LLQP Segregated Funds & Annuities · Component 2.1 · 30% of the exam
An agent compares two bond segregated funds and notes that one has a much longer average duration. The practical consequence is that:
- the longer-duration fund will move more sharply when interest rates change
- Bthe longer-duration fund pays its interest income annually while the other pays it monthly
- Cthe longer-duration fund holds bonds of much lower credit quality than the shorter one does
- Dthe longer-duration fund cannot be sold until the bonds it holds have finally reached maturity
Correct answer: A) the longer-duration fund will move more sharply when interest rates change
Duration measures how sensitive a bond portfolio is to interest rate movements. A longer duration means a larger gain when rates fall and a larger loss when rates rise, which matters for a client who may need the money soon.
Why the other options are wrong
- BDuration describes rate sensitivity, not how often the fund distributes its income.
- CDuration is about term, not credit; a long portfolio can be entirely government issued.
- DSegregated fund units remain redeemable regardless of the maturities inside the fund.
Exam tip
Longer duration means a bigger price swing for the same change in interest rates.
Common mistake
Assuming a longer-duration bond fund is riskier because of credit rather than rates.
What this tests
CISRO competency component 2.1 — Analyze the available products that meet the client's needs — which is weighted at 30% of the Segregated Funds & Annuities module. Written against the published curriculum.
More from component 2
- A segregated fund's 'guaranteed amount' after a partial withdrawal under proportional reduction is:
- A distinctive estate advantage of a segregated fund over a non-registered mutual fund held jointly with a child is:
- Segregated fund guarantees are most valuable relative to their cost when:
- A segregated fund's annual statement reports:
- Compared with a segregated fund, an exchange-traded fund (ETF) generally offers:
- A segregated fund's 'automatic death benefit reset' feature:
Practice the whole Segregated Funds & Annuities module
Timed sets weighted like the exam, and review of every question you miss. Free to start.