1. Under CIPF coverage, a general account includes the total of what accounts?
III. short sale
VI foreign currency
a) I, II
b) I, II, IV, V
c) I, II, III, IV, V
d) I to VI
2. What statements are correct about interest rates and the real rate of return?
I. Interest rates are the result of the interaction between parties who want to borrow funds and parties who want to lend funds.
II. The rate of return that a bond (or any investment) offers is made up of two components: the real rate of return and the inflation rate.
III. Because inflation reduces the value of a dollar, the return that is received, known as the nominal rate, must be reduced by the inflation rate to arrive at the actual or real rate of return.
IV. The real rate of return is determined by the supply of funds (supplied by investors) and the demand for loans (created by business). Businesses are more inclined to borrow to invest, when they believe that this investment will earn returns that are higher than the cost of borrowing. For example, when real interest rates are low, the demand for funds will rise.
V. The supply of funds tends to rise when real rates are high, as investors are more likely to lend funds. The nominal rate for loans will be made up of the real rate, as established by supply and demand, plus the expected inflation rate; and the Nominal Rate = Real Rate + Inflation Rate
VI. One factor that affects forecasts for the real rate of return is the business cycle. Real rates rise and fall throughout the business cycle, becoming higher during recessions as demand for funds falls, and lower during the expansion phase as demand for funds increase.
VII. Another factor that affects forecasts for the real rate of return is an unexpected change in the inflation rate. An investor lending money will demand an interest rate that includes his or her expectations for inflation, thereby assuring a satisfactory real rate. If the inflation rate is higher than expected, the investor’s real rate of return will be lower than expected.
a) I, II, III, IV
b) I, II, III, IV, V, VII
c) V, VI, VII
d) I, II, III, IV, V, VI, VII
1. d) I to VI
Chapter 3: The Canadian Regulatory Environment
2. b) I, II, III, IV, V, VII
VI should read: Real rates of return become lower (not higher) during a recession and rise (not fall) during expansion.
Chapter 7: Fixed-Income Securities: Pricing and Trading
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