An exchange-traded fund tracking the S&P/TSX Composite Index is described as a passively managed fund. Which of the following best explains the primary distinction between a passively managed ETF and

B. A passive ETF mirrors an index's holdings and weights, while active managers pick securities to beat it

A client holds a bond with a fixed coupon of 4% and five years remaining to maturity. The Bank of Canada raises its overnight rate by 100 basis points. All else being equal, what effect does this have

D. The bond's market price falls since new bonds now offer higher coupons than this one does

A client asks about the tax treatment of Canadian dividends received in a non-registered account. The registrant explains that eligible dividends from Canadian corporations receive preferential tax tr

B. The dividend tax credit offsets tax the corporation already paid, lowering the shareholder's tax owed

Free practice

CIRE practice questions: fixed income

Ten CIRE practice questions on fixed income. The blueprint covers bond pricing, current yield, yield to maturity, modified and Macaulay duration, convexity, accrued interest, and yield-curve shapes. Most candidates over-prepare on the YTM rule of thumb and under-prepare on the relationship between duration and price under non-parallel yield-curve shifts. The exam tests intuition over calculation.

Take the free 25-Q diagnostic See the full bank

10 free questions

Click a question to reveal the answer and the explanation. The full bank includes an AI tutor on every wrong answer with the rule citation behind the question.

1
An exchange-traded fund tracking the S&P/TSX Composite Index is described as a passively managed fund. Which of the following best explains the primary distinction between a passively managed ETF and an actively managed mutual fund?
Outcome 4.1 · click for answer
A.Passive ETFs never charge management fees since no manager selects the securities held
B.A passive ETF mirrors an index's holdings and weights, while active managers pick securities to beat itCorrect
C.Passive ETFs always outperform active funds because removing manager bias guarantees better returns
D.Active mutual funds always hold a set minimum of government bonds under securities regulation
The defining characteristic of a passively managed ETF is that it aims to replicate, not beat, a benchmark index, typically by holding the same securities in the same weights as the index. Actively managed funds employ portfolio managers who select and weight securities based on their investment thesis with the goal of outperforming the benchmark. Passively managed ETFs still charge management fees, though they are typically lower, and there is no regulatory mandate requiring actively managed funds to hold government bonds.
2
A client holds a bond with a fixed coupon of 4% and five years remaining to maturity. The Bank of Canada raises its overnight rate by 100 basis points. All else being equal, what effect does this have on the market price of the client's bond?
Outcome 4.2 · click for answer
A.The bond's market price rises since coupon payments discount at a lower prevailing rate
B.The bond's market price stays the same because the coupon rate does not change after issue
C.The bond's market price rises as higher rates signal economic strength and boost bond demand
D.The bond's market price falls since new bonds now offer higher coupons than this one doesCorrect
Bond prices and interest rates move inversely. When prevailing rates rise, newly issued bonds carry higher coupons than the existing bond, reducing the existing bond's attractiveness and causing its price to fall until the yield to maturity reflects current market rates. The fixed coupon does not change, but the price adjusts downward to make the effective yield competitive. This inverse relationship is a foundational principle of fixed income analysis tested throughout the CIRE.
3
A client asks about the tax treatment of Canadian dividends received in a non-registered account. The registrant explains that eligible dividends from Canadian corporations receive preferential tax treatment compared to interest income. Which tax mechanism best explains this treatment?
Outcome 4.3 · click for answer
A.Capital gains inclusion rules apply to dividends, so both are always taxed identically
B.The dividend tax credit offsets tax the corporation already paid, lowering the shareholder's tax owedCorrect
C.The credit only applies inside an RRSP account, where withdrawals always keep the preferential dividend rate
D.Provincial governments always exempt eligible dividends from tax under a blanket statutory rule
The Canadian dividend tax credit system is designed to prevent double taxation: a corporation pays corporate tax on its earnings, and the dividend tax credit at the personal level compensates individual shareholders for a portion of that corporate tax. Eligible dividends from Canadian corporations are grossed up and then offset by the dividend tax credit, resulting in a lower effective tax rate compared to interest income. This treatment applies in non-registered accounts; dividends sheltered inside an RRSP lose the credit because RRSP withdrawals are taxed as ordinary income regardless of source.
4
A client writes a covered call option on 100 shares of a company she already owns. The call has a strike price of $55 and a premium of $2 per share. The current share price is $52. Which statement accurately describes the client's position?
Outcome 4.4 · click for answer
A.Her gain on the shares is capped at $55, and the $200 premium only partly offsets a price declineCorrect
B.She must always sell another 100 shares at $55 per share if the call is exercised against her
C.Her maximum possible loss on this position is limited to the $200 premium she collected
D.She keeps unlimited upside on the shares in addition to the $200 premium she received
A covered call writer owns the underlying shares and sells a call option against them. The premium received ($200) provides immediate income and a small downside cushion, but the writer's upside is capped: if the shares trade above $55 at expiration, the call buyer will exercise and the writer must deliver the shares at $55 regardless of the market price. The maximum loss is not limited to the premium; the client retains full downside exposure on the shares minus the premium received. A covered call involves selling, not buying, so no obligation to purchase additional shares arises.
5
OBSI (the Ombudsman for Banking Services and Investments) provides dispute resolution services to retail investors in Canada. Which of the following statements correctly describes OBSI's authority?
Outcome 7.2 · click for answer
A.OBSI issues binding arbitration awards that always force dealers to pay a set compensation cap
B.OBSI only accepts complaints referred by CIRO and never takes complaints filed directly by clients
C.OBSI always holds the same enforcement authority as CIRO, including power to revoke registrations
D.OBSI recommends compensation but cannot force payment, though it can publicly name non-compliant firmsCorrect
OBSI operates as a free, independent dispute resolution service for banking and investment complaints. Its recommendations are non-binding: firms are not legally compelled to comply, but OBSI publishes the names of firms that decline to follow recommendations, creating reputational and regulatory consequences. OBSI does not have SRO enforcement powers and cannot revoke registrations. Retail clients may bring eligible complaints directly to OBSI after completing the firm's internal complaint process.
6
A retail client submits a written complaint alleging that an RR made unsuitable recommendations that caused a $20,000 loss. Under CIRO's complaint-handling framework, which body has primary responsibility for the initial investigation and response?
Outcome 4.1 · click for answer
A.The provincial securities commission investigates the complaint and the dealer acts only as a witness
B.OBSI investigates the complaint first and the dealer only responds after OBSI issues its recommendation
C.CIRO investigates the complaint directly and reports its findings back to the dealer member
D.The dealer member acknowledges, investigates, and responds in writing within CIRO's set time limitsCorrect
Under CIRO's complaint-handling rules, the dealer member is the primary first responder for retail client complaints. The firm must acknowledge receipt promptly, conduct a thorough internal investigation, and provide a substantive written response within the time limits set by CIRO. CIRO's role is to ensure the firm has adequate policies and procedures and to take enforcement action if those obligations are not met. OBSI is available as an independent escalation avenue after the dealer's internal process is exhausted. Provincial commissions are not the first-level complaint handler.
7
A client contacts a dealer's complaint desk alleging that her registrant placed unauthorized trades in her account. Under IDPC Rule 3700, within what timeframe must the dealer acknowledge receipt of the complaint?
Outcome 4.1 · click for answer
A.Acknowledgement is due within 10 business days of receiving the complaint
B.The dealer must acknowledge the complaint on the same business day it arrives
C.Acknowledgement timing is left to the dealer's own internal complaint policy
D.Acknowledgement of the complaint is required within 5 business daysCorrect
IDPC Rule 3700 requires a dealer to acknowledge receipt of a written retail client complaint within 5 business days. The acknowledgement must include information about the complaint-handling process and the client's right to escalate to an independent dispute resolution service such as OBSI. Internal policy cannot extend this minimum; 'reasonable time' is not the CIRO standard. Same-day acknowledgement is not required.
8
After completing the dealer member's internal complaint process, a retail client remains dissatisfied and wants to escalate. Which of the following correctly describes the options available to the client?
Outcome 4.2 · click for answer
A.The client needs CIRO to approve and forward the file since OBSI only opens referred cases
B.Civil litigation is the client's only path left, since OBSI only acts on the dealer's request
C.OBSI reviews the complaint free of charge, can recommend compensation, and names firms that refuseCorrect
D.The securities commission is the sole option left, and it can order the dealer to pay within 30 days
After completing the dealer's internal complaint process, a dissatisfied retail client may bring their complaint to OBSI - the Ombudsman for Banking Services and Investments - at no cost, and the client initiates this directly (not via a referral from CIRO or the dealer). OBSI investigates independently and may recommend compensation up to its prescribed maximum. OBSI recommendations are not legally binding on the firm, but OBSI publishes the names of firms that decline to implement recommendations. The client also retains the right to seek civil remedies through litigation regardless of the OBSI process, and provincial securities commissions do not adjudicate individual compensation claims for the client.
9
Under IDPC Rule 3700, what is the maximum time a dealer has to provide a substantive response to a retail client's written complaint?
Outcome 4.2 · click for answer
A.Within 6 months of receipt, matching the provincial limitation period
B.Within 30 calendar days of receipt, per provincial consumer protection law
C.Within 45 business days of receipt, matching OBSI's internal timeline
D.Within 90 calendar days of receipt, addressing the client's concernsCorrect
IDPC Rule 3700 requires the dealer to provide a substantive response to a retail client's written complaint within 90 calendar days of receiving the complaint. A substantive response must address the client's concerns and communicate the dealer's position. If 90 days pass without a final response, or if the client is unsatisfied, the client is entitled to escalate to OBSI. The 45-business-day figure is sometimes confused with OBSI's internal timeline, and the 30-day figure applies to certain provincial consumer protection statutes.
10
An RR recommends a series of trades over 18 months that generates $45,000 in commissions on a $150,000 account while the account loses 18% of its value. The client complains. Which concept best describes the potential liability issue?
Outcome 4.3 · click for answer
A.Churning, excessive trading generating commissions with no regard for client objectives or suitabilityCorrect
B.Wash trading, matched buy and sell orders creating fake activity with no real ownership change or risk
C.Frontrunning, the RR trades ahead of a known client order to profit before the client's trade executes
D.Late trading, pricing orders placed after market close at that day's already-set net asset value
Churning is the practice of excessively trading a client's account to generate commissions, without regard for the client's investment objectives or financial situation. The combination of high commission generation ($45,000 on a $150,000 account; a 30% cost ratio over 18 months), significant portfolio loss, and a pattern of frequent trading are classic churning indicators. IDPC Rule 3500 prohibits conduct that is not in the client's best interest, and a churning finding can attract both CIRO sanctions and civil liability. Wash trading involves no genuine change in beneficial ownership and no real economic risk, frontrunning requires trading ahead of a known pending order, and late trading involves mispricing orders placed after the close — none of these fit the facts, which show real trading activity, real losses, and a real commission-driven pattern.

Want 100 more questions on this topic?

Element 1 of every CIRO course is free, lessons, practice bank, AI tutor. No card to try. $29.99/month (cancel anytime) or $249/year (30-day money-back) unlocks the rest.

Start free Try the mock exam first

FAQ

Do I need to compute YTM by hand?

No. The CIRE tests the YTM rule of thumb (C plus (F minus P) over n, all divided by (F plus P) over 2) for ballpark answers, and the directional relationship between price and yield. You will not be asked for a 5-decimal YTM. Most exam questions are answerable from the duration formula (price change is approximately negative ModDur times delta y) plus the convexity correction.

What is the difference between modified and Macaulay duration?

Macaulay duration is the weighted average time to cash flow, in years. Modified duration is Macaulay divided by 1 plus y. Modified duration estimates percentage price change for a 100 basis point yield move. The modified version is what you use for price-change problems. Macaulay is what you use for immunization problems.

When does duration fail?

Duration is a first-order approximation. For yield moves above roughly 50 basis points, the convexity correction matters. For yield-curve twists (short rates moving differently from long rates), duration is the wrong tool entirely. The exam will set up a non-parallel-shift scenario and ask which bond is more affected. The answer depends on cash-flow timing, not duration alone.

What about settlement?

Most Canadian fixed-income trades settle T+1 since May 27, 2024. Accrued interest is calculated to the settlement date. The buyer pays accrued interest to the seller. The accrual day count depends on the bond (30/360 for most corporates, actual/actual for most government bonds).

Can I get more fixed-income questions?

Yes. Element 4 plus the fixed-income outcomes in Element 7 give you over 100 questions in the Registrant Prep bank. The AI tutor walks through every wrong-answer with the rule and the math.

CIRE practice questions: fixed income

10 free questions

FAQ

Related practice