clearlycanadian

Endowment investment policy statements usually pay attention to the liquidity constraint determined by spending requirements. Which of the following statements most accurately represents an endowment’s relationship to spending? Endowments:

A) use spending rules to minimize spending volatility.

B) use spending rules to maximize spending.

C) no longer use spending rules to estimate spending levels.

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To minimize adverse impacts of spending volatility, endowments often employ spending rules that tend to minimize spending level volatility.

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A life insurance company’s liquidity requirement differs from a non-life insurance company’s requirement in that a life insurance company’s liability structure is uncertain in its:

A) timing and amount, while a non-life insurance company's liability structure is also uncertain in its amount and timing.

B) amount, while a non-life insurance company's liability structure is uncertain in both its amount and timing.

C) timing, while a non-life insurance company's liability structure is uncertain in both its amount and timing.

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Life insurance companies have liability structures that are uncertain in timing but not amount. Non-life insurance companies have liability structures that are uncertain in both amount and timing.

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Which of the following represents the most appropriate objective found in a bank’s investment portfolio?

A) Assist with increasing after-tax income.

B) Assist with generating capital gains-only profits.

C) Assist with generating income-only profits.

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The most appropriate objective is to increase after-tax income, not only profits associated with income or capital gains.

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Assessing the capital risk position is relevant to the investment management process at a bank because it indicates the appropriate amount of:

A) risk weighted assets.

B) liquidity weighted assets.

C) credit weighted assets.

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Assessing a bank’s capital risk position indicates the level of capital that must be held by the bank to support investment activities.

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Ed Simon, CFA, has been assigned the arduous task of assessing the slight nuances concerning the investment objectives and constraints for foundations and endowments. Simon’s supervisor has requested a full report on these differences and how they affect the investment policy statements.Simon thought it best to first look at differences in return objectives between foundations and endowments. Which of the following best indicates differences between the return objectives of foundations and of endowments?

A) Endowment returns usually are dictated by a rule-of-thumb of "5.3% + inflation," whereas foundation return objectives are dictated by spending rules.

B) Foundation return objectives are to provide a permanent base of funding whereas endowment return objectives depend on the time horizon of the endowment.

C) Foundation return objectives depend on the time horizon of the foundation, whereas endowment return objectives are to provide a permanent base of funding.

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Foundations may be finite-lived entities, but endowments are created to provide a permanent base of funding.

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Simon next turned his attention to the differences in risk objectives between foundation and endowment investment policy statements. Which of the following best describes the main difference between foundation and endowment risk objectives?

A) Endowment risk tolerance is not dictated by the relationship between the current income requirement and maintenance of purchasing power, whereas this is a crucial factor for foundations.

B) Foundation risk tolerance is dependent on the importance of foundation funds in the sponsor's overall budget picture, while endowment risk tolerance is dependent on the time horizon of the endowment.

C) Foundation risk tolerance is dependent on the time horizon of the foundation, whereas endowment risk tolerance is dependent on the importance of the endowment fund in the sponsor's overall budget picture.

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Risk tolerance of foundations is critically linked to any time horizon structure while endowment risk tolerance is dependent on the importance of endowment funds in a sponsor’s overall budget picture.

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Foundations and endowments often have differential liquidity constraints. Simon found which of the following to be a difference between the liquidity constraints of a foundation and an endowment?

A) Private foundations are required to have a minimum spending rate whereas endowments rarely have minimum spending rates.

B) An endowment's spending rule will have less of an effect on liquidity requirements than a foundation's liquidity requirement due to a minimum spending rate.

C) Endowments are required to have a minimum spending rate whereas private foundations rarely have minimum spending rates.

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Private foundations are required to pay out at least 5% of assets on an annual basis. Endowments do not have minimum spending requirements.

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Simon discovered tax laws seem to differentially impact foundations and endowments. Which of the following most accurately depicts the differential tax treatment between foundations and endowments?

A) Operating foundation investment income is taxable, whereas endowment investment income is not.

B) Private foundation investment income is taxable, whereas endowment investment income is not.

C) Endowment investment income is taxable, whereas private foundation investment income is not.

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Private foundation investment income is taxable, whereas other foundations and endowments are not.

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Which of the following are characteristics of public foundations’ and endowments’ liquidity needs, respectively?

A) Moderate; moderate.

B) Low; varies.

C) Varies; low.

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A foundation determines what its spending needs are, which thereby causes liquidity to vary for each foundation. Liquidity is low for endowments—usually only for emergencies and spending.

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Which of the following statements best compares the legal and regulatory constraints when managing a pension plan versus managing an endowment fund?

A) Endowment funds are managed according to the "prudent expert" rule while benefit plans are managed under the "prudent investor" rule.

B) State pension laws generally supersede Federal pension laws regarding pension plans whereas endowment funds are primarily regulated at the Federal level.

C) Pension plans are managed according to the Employee Retirement Income Security Act while endowment funds are governed by the Uniform Management Institutional Funds Act.

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With respect to the legal and regulatory constraints, pension plans are regulated by the Employee Retirement Income Security Act (ERISA) while endowment funds are governed by the Uniform Management Institutional Funds Act (UMIFA).

Pension plans are held to a higher standard known as the “prudent expert” rule which states that ERISA fiduciaries must discharge their duties…” with care, skill, prudence, and diligence under circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of like character and aims.”
By diversifying the investments of the plan we minimize the risk of large losses.

Endowment plans are held to a standard known as the “prudent investor” rule, which states that fiduciaries must adhere to fundamental duties of loyalty, impartiality and prudence as well as maintain overall portfolio risk at a reasonable level and provide for the reasonable diversification of investments.
Fiduciaries must also act with prudence in deciding whether and how to delegate authority to experts and in selecting and supervising agents.

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Which of the following objectives and/or constraints would be found in an investment policy statement (IPS) for a private foundation but NOT necessarily for an endowment?

A) Set spending rates.

B) Total return approach.

C) Moderate to high risk tolerance.

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Both foundation and endowment IPS should include a return objective that specifies a total return approach. Additionally, both foundations and endowments have moderate to high risk tolerance levels. Only private foundations are required to set spending rates.

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Which of the following entities could be subject to unrelated business income tax (UBIT)?

A) Only foundations.

B) Endowments and foundations.

C) Only endowments.

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UBIT must be paid by both endowments and foundations if income is produced that is not substantially related to a foundations’/endowments’ charitable purpose.

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The investment policy statement (IPS) of which of the following entities may include language pertaining to net interest spread?

A) Insurance companies.

B) Endowments.

C) Defined benefit plans.

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Net interest spread is the difference between interest earned and interest credited to policyholders. Therefore, net interest spread may be talked about in the return objectives of an insurance company’s IPS.