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Author: brefong One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 1189  
Subject: Book Value vs. Market Value Date: 11/3/1999 1:55 AM
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OK, I'm really confused with this one.

A RRSP has two components:

1. 80% Canadian content,
2. 20% foreign content.

These percentages are based on "book value". That is, at the price at which you bought the mutual fund/equities. Now, day to day fluctuations will cause the "market value" to change.

Now, let's go into a hypothetical situation.

Jean Cretian has $100,000 to invest in his RRSP. He purchases two stocks. A Canadian stock CANSTOCK (TSE: CS) and an American stock, AMSTOCK (AMEX: AS). Jean buys $80,000 worth of CS and $20,000 worth of AS. AS is his 20% foreign content.

Over time, the foreign content increases in market value, and the Canadian content decreases in market value. For the example we'll say that the market value of CS and AS are now both worth $50,000.

Question 1:

If Jean decides to sell all of his Canadian content (to purchase a different Canadian stock), would he be forced to sell part of his foreign content in order to rebalance his RRSP? What would he have to do?

Let's remember here, that the foreign content has a book value of $20,000, and Canadian content has a new book value of $50,000.

Help!


Brendan
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