IFIC Chapter 13 Exam Questions With
Verified Answers.
Alternative Managed Products - answer✔-professionally managed portfolios of basic asset
classes and/or commodities and include segregated funds, hedge funds, alternative mutual funds,
exchange-traded funds, closed-end funds and principal-protected notes (PPN)
What Distinguishes Alternative Managed Products - answer✔-use of complex investment
strategies, such as the use of derivatives, leveraging and principal guarantees, skewing risk/return
profiles
Principal-Protected Note (PPN) - answer✔-a debt instrument. Like other debt instruments, a PPN
has a maturity date upon which the issuer agrees to repay investors their principal. In addition to
the principal, PPNs provide interest paid either at maturity or as regular payments linked to the
positive performance of the underlying PPN asset.
-the underlying assets can be common stocks, indexes, mutual funds, exchange-traded funds,
commodities or hedge funds
-issued only by the 6 major banks
-these products are not mutual funds; as a result, they are not held to the transparency standards
of mutual funds
-the PPN doesn't have a guaranteed return, while a simple GIC does.
Banks 3 Main Roles In PPNs - answer✔-issuers- the banks guarantee the return of principal at
maturity. The value of the guarantee is based wholly on the perceived creditworthiness of the
issuer.
-manufacturers- they choose the underlying asset, the term to maturity, and any special features
tied to interest payments.
-distribute- primarily through their investment dealer arm, although some banks use a third-party
investment dealer or mutual fund dealer
Explicit Costs Of Principal-Protected Notes - answer✔-commissions
-managements fees
-early redemption fees
-structuring costs and guaranteed fees
PPN Risks - answer✔-lack of transparency
-lack of knowledge regarding suitability
-not protected by CIDC
-not issued under a prospectus
-risks also include market, liquidity, credit and, currency
PPN Commissions - answer✔-PPNs differ from mutual funds in that investors bear the cost of
the commission at the time of purchase because the net asset value (NAV) of the PPN declines
directly as a result of commissions paid.
PPN Management Fees - answer✔-many PPNs carry a management fee for actively managing
the PPN's assets. Some PPNs, however, are issued without management fees. When a
management fee is charged it is charged to the assets of the PPN. Management fees affect the
PPN's performance, which in turn affects the final payoff received by investors.
PPN Early Redemption Fees - answer✔-many PPNs carry an early redemption fee or deferred
sales charge. A typical early redemption fee schedule runs from two to five years and declines
over time, as with a mutual fund. The purpose of the early redemption fee is to ensure that the
PPN's issuer receives the full fees it was expecting.
PPN Structuring Costs and Guarantee Fees - answer✔-some PPNs include an explicit charge for
structuring, and most PPNs charge a fee for providing the capital guarantee
Implicit Costs - answer✔-fees borne by investors that may or may not be immediately visible
and that may or may not be openly disclosed in the documents
Implicit Costs Of Principal-Protected Notes - answer✔-performance averaging formulas
-performance participation caps
-price returns vs. total returns
PPN Performance Averaging Formulas - answer✔-many mutual fund-based and income-
producing PPNs use performance averaging formulas in which the PPN's final payoff is based
not on the value of the underlying asset at maturity, but on some average performance of the
underlying asset over the life of the note. This average performance typically is based on the
note's monthly average NAV and may raise or lower the return to investors.
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