CSC 120 Final Exam Questions with Answers 2024, Exams of Sociology

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Canadian Securities (CSC) Test #1 Study

Guide 2024

Retail firms ✔ full service and discount brokerage firms for individuals. Institutional firms ✔ includes pension funds, mutual funds, and insurance companies. Integrated firms ✔ contains all aspects of retail and institutional firms. Front office ✔ in charge of portfolio management, marketing, sales, and trading. Middle office ✔ in charge of compliance, accounting, audits, and legal. Back office ✔ in charge of settlements and clearing. Schedule I banks ✔ large domestic banks. There are ownership restrictions on shares - must be widely held. Schedule II banks ✔ large foreign banks. Can do same activities as domestic banks. Schedule III banks ✔ foreign branches of banks. They are limited, with a more institutional focus. Trust company ✔ acts as a trustee. Auction market ✔ market in which securities are bought and sold by brokers acting as agents for their clients (stock exchanges). Dealer market ✔ a network of marketplaces. Here, trades are conducted OTC and consist of bonds and debentures. Equity electronic trading system

✔ competes with existing exchanges. They can only trade stocks that are on an existing exchange. They may have benefits such as different hours, better commission, etc. Fixed-income electronic trading system ✔ where almost all bonds are traded (such as CanDeal). Structured product ✔ has the characteristics of debt, equity, and the investment fund (can be in the form of principal-protected notes or index-linked guarantees). IIROC (Investment Industry Regulatory Organization of Canada) ✔ the Canadian investment industry's SRO. It carries out its responsibilities through setting and enforcing rules regarding the proficiency, business, and financial conduct of dealer firms and their registered employees. MFDA (Mutual Fund Dealers Association) ✔ the SRO that regulates the distribution (dealer) side of the mutual fund industry in Canada. OSFI (Office of the Superintendent of Financial Institutions) ✔ the federal regulatory agency whose main responsibilities regarding insurance companies and segregated funds are to ensure that the companies issuing the funds are financially solvent. CDIC (Canadian Deposit Insurance Corporation) ✔ a federal Crown Corporation providing deposit insurance against loss (up to $100,000 per depositor) when a member institution fails. CIPF (Canadian Investor Protection Fund) ✔ a fund that protects eligible customers in the event of the insolvency of an IIROC dealer member. General acct. = $1M total Separate acct. = $1M each MFDA IPC (Mutual Fund Dealers Association Investor Protection Corporation) ✔ provides protection for eligible customers of insolvent MFDA member firms. General acct. = $1M total Separate acct. = $1M each Gatekeeper ✔ protects markets from potentially illegal client activity by collecting information, monitoring activity, and reporting suspicious behaviour. "Know your client" rule

✔ salespersons must use diligence to learn essential facts about the client (including every account and order) before entering into the relationship, in order to make appropriate decisions for the client. Ombudsman for Banking Services and Investments (OBSI) ✔ an independent organization that investigates customer complaints against financial services providers (non binding, but may hurt the company's reputation if it does not comply). Front running ✔ when a broker puts his own account's order in front of a customer's order, knowing the customer's order will move prices so the broker can make a profit. National "Do not call" List (DNCL) ✔ prohibits telemarketers from calling any number on the list that has been registered for 31+ days. Expansion ✔ characterized by stable inflation, adequate inventory, start-ups exceed bankruptcies, strong stock market, rising market activity (leading indicator), and falling unemployment. Peak ✔ when demand outstrips capacity, wages rise, interest rates fall, sales decline, and inventory rises. Stock prices decline, and market activity declines. Contraction ✔ when economic activity declines, profits decline, spending declines, and saving increases. Trough ✔ when the bond market rallies (prices rise as rates fall), and consumers start spending again. Recovery ✔ when GDP returns to its previous peak, investment rises, and inflation is set to fall further. Current account ✔ includes the exchange of goods between Canadians and foreigners, earnings from individual income, dividends, and transfers for foreign aid. Capital and financial account ✔ includes the financial flows between Canadians and foreigners (selling assets or borrowing funds to deal with surplus/deficit). Leading indicators

✔ peak and trough before the overall economy (such as housing starts or stock market indexes). Coincident indicators ✔ change at the same time as the market - GDP. Lagging indicators ✔ change after the economy, such as unemployment. Natural unemployment rate ✔ the unemployment rate when the economy is at full employment. Higher interest rates ✔ - Increase cost of capital = leading to lower investment

• Discourages consumer spending
• May lead to economic slowdown Exchange rates ✔ increased by rising interest rates or sale of commodities. Fiscal policy ✔ In charge of:
• Govt. spending, taxation, borrowing
• Federal Budget Monetary policy ✔ In charge of:
• Canadian financial system (regulation, clearing, and settlement)
• Issuing bank notes
• Act as Govt. fiscal agent (banker) Overnight market ✔ when the BOC changes the target overnight rate, other short-term and long-term rates tend to follow. It is based on a 50 basis point (0.5%) operating range. Bank rate ✔ the upper limit of the overnight operating interest rate band. Sale and Repurchase Agreements (SRAs) ✔ an open-market operation by the Bank of Canada used to offset undesired downward pressure on overnight financing costs. Used when the Govt. wants to slow down the economy a bit. Special Purchase and Resale Agreements (SPRAs) ✔ an open-market operation by the Bank of Canada used to relieve undesired upward pressure on overnight financing rates. Used to stimulate the economy.

Drawdown ✔ a transfer from banks to the BOC to lower the money supply. Redeposit ✔ a transfer from the BOC to the banks to raise the money supply. Liquid bonds ✔ bonds with good trading volumes, where large trades are quick and prices are not affected (have a ready market). Marketable bonds ✔ have a ready market, but not liquid - such as private-placements (cannot be sold on the secondary market). Negotiable bonds ✔ bonds that are in "good delivery form" (easy to transfer ownership). In some ways, this is an antiquated concept (where bonds were physical). All bonds that trade on the market today are considered to be in "good delivery form". Convertible bond ✔ a bond with an option allowing the bondholder to exchange the bond for a specified number of shares of common stock in the firm. If the stock price < conversion price = acts like bond. If the stock price > conversion price = acts like stock. Sinking fund ✔ sums of money set aside out of earnings each year to provide for the repayment of all or part of a debt issue at maturity (mandatory). Purchase fund ✔ set up to retire a specific amount of bonds through purchases in the market, if they can be made at or below a stipulated price. Negative pledge provision ✔ a protective provision written into the trust indenture of a company's debenture issue providing that no subsequent mortgage bond issue may be secured by all or part of the company's assets, unless at the same time the company's debentures are similarly secured. T-bills ✔ Government of Canada bonds that mature in 3-month, 6-month, or 12-month maturities. They do not pay interest, but are instead sold at a discount and mature at par. The return is taxable as income, and not a capital gain. Canada Savings Bonds (CSBs)

✔ a type of savings product that pays a competitive rate of interest and that is guaranteed for one or more years. They may be cashed at any time and, after the first three months, pay interest up to the end of the month prior to being cashed. Banker's Acceptance ✔ a short-term commercial draft sold at a discount (similar to a T-bill). Commercial Paper ✔ a short-term corporate money market security. Escalating GIC ✔ the interest rate for these GICs increases over the term. Laddered GIC ✔ the investment for these GICs is evenly divided into multiple-term lengths. As each portion matures, it can be reinvested or redeemed (this diversification reduces interest rate risk). Instalment GIC ✔ an initial lump sum contribution is made for these GICs, with further minimum contributions made weekly, bi-weekly, or monthly. Index-linked GIC ✔ these GICs guarantee a return of the initial investment at expiry and some exposure to equity markets. Interest-rate linked GIC ✔ these GICs offer interest rates linked to the change in other rates such as the prime rate, the bank's non-redeemable GIC interest rate, or money market rates. T-bill yield ✔ [(100-Price)/Price] x (365/term) x 100 Current yield ✔ Annual dollar amount of interest/Current market price Bond selling at a discount ✔ If bond price is less than $1000. YTM > Coupon Rate Bond selling at a premium ✔ If bond price is greater than $1000. YTM < Coupon Rate Expectations theory

✔ says that current LT interest rates foreshadow future short-term rates. According to this theory, investors buying a single LT bond should expect to earn the same amount of interest as they would buying two ST bonds of equal combined duration. Liquidity preference theory ✔ says that investors prefer ST bonds because they are more liquid and less volatile in price. Market segmentation theory ✔ says that the yield curve represents the supply and demand for bonds of various terms, which are primarily influenced by the bigger players in each sector. Reinvestment risk ✔ the risk that the coupons cannot be reinvested at the same interest rate that prevailed at the time of purchase. Duration ✔ a measure of the sensitivity of a bond's price to changes in interest rates (takes both maturity and coupon rate into account). The longer it is, the more a bond's price will change for a given change in interest rates. Accrued interest ✔ Interest that has built up but has not yet been paid. Pay both the stated asking price for the bond + Interest from the previous period. Stated asking price x [Coupon rate x (term/365)] Common share advantages ✔ - Potential for capital appreciation

• Dividends
• Favourable tax rate
• Voting rights
• Limited liability
• Marketability Dividend record date ✔ date which recorded shareholders receive the dividend. Cum dividend ✔ up to the 2nd business day before record date. Ex dividend ✔ 1 day before record date. Dividend Reinvestment Plan (DRIP)

✔ an investment plan that allows the investor to automatically reinvest stock dividends in the same company's stock without paying any brokerage fees Subordinated voting ✔ where shares are given preferential treatment (e.g. Class A shares = 1 vote/share; Class B shares = 10 votes/share) Preferred share advantages ✔ - No obligation to pay dividends

• No maturity date
• Greater flexibility
• No dilution of earnings
• No dilution of control
• Only entitled to a "fixed" return Cumulative dividends ✔ preferred dividends that accumulate from year to year until paid (in arrears). Delayed floater preferred ✔ entitles the holder to a fixed dividend for a predetermined amount of time after it becomes variable. Convertible preferreds ✔ preferred shares that can be converted into common stock at the bondholder's option. They provide a higher dividend yield than common shares, but lower than a straight preferred. Retractable preferreds ✔ preferred shares that the holder can force the company to buy back. As market rates rise, it becomes more desirable. Floating preferreds ✔ protects against interest rate increases. The downside is that dividends can decrease if interest rates call - it works both ways. Foreign-pay preferreds ✔ If the currency is strong, there is an opportunity for gain on foreign exchange. The downside is the risk of declining foreign exchange rates. Deferred preferred shares ✔ pays no dividend until a future maturity date. Dividends compound without having to pay annual taxes. At maturity, the dividends are taxed at interest income. Buy-in ✔ the obligation to buy back the stock after selling it short. Becomes effective if adequate margin cannot be maintained.

Confirmation ✔ the document that a dealer sends to the client when a transaction is made (at the latest, by the next day). Two main types of derivatives ✔ options and forwards. Exchange-traded derivative characteristics ✔ - Standardization

• Clearinghouse acts as 3rd party guarantor
• Gains and losses accrue (marking to market)
• Heavily regulated
• Performance bond required
• Prices public immediately
• Delivery rarely takes place (usually want to profit or hedge - not typical to want the underlying asset) OTC-traded derivative characteristics ✔ - Customizable
• No 3rd party guarantor
• Gains and losses settled at the end of contract
• Less regulated
• Delivery usually takes place Bourse de Montreal (Montreal Exchange) ✔ where all options and futures in Canada are traded. ICE Exchange ✔ where agricultural options and futures in Canada are traded. Intrinsic value ✔ the "in-the-money" option of an option's price (either positive or zero, cannot be negative). Call: Mkt - Strike Put: Strike - Mkt Time value ✔ Option's premium - Intrinsic value Rights and warrants ✔ a privilege granted to existing shareholders that allows them to buy a number of shares proportionate to shares owned. LT Equity AnticiPation

✔ a LT option that offers the same risk/reward as a regular option (good for more than 9 months). Capitalization ✔ recording an expenditure as an asset rather than an expense so that it can be spread over more than 1 accounting period (placed on the B/S) Goodwill ✔ the probability that a regular customer will continue to do business. Investments in Associates ✔ the degree of ownership a company has in another. Right of withdrawal ✔ a two-day time window for investors to change their mind. Right of recission ✔ right to cancel a purchase if the prospectus has a mistake. Right to action for damages ✔ the right to take action for damages if the prospectus contains a material misrepresentation. Competitive tender ✔ a distribution method used in particular by the Bank of Canada in distributing new issues of government marketable bonds. Bids are requested from primary distributors and the higher bids are awarded the securities for distribution. Non-competitive tender ✔ A method of distribution used in particular by the Bank of Canada for Government of Canada marketable bonds. Primary distributors are allowed to request bonds at the average price of the accepted competitive tenders. There is no guarantee as to the amount, if any, received in response to this request (used for GSDs) Government securities distributors (GSD) ✔ typically an investment dealer or bank that is authorized to bid at GOC debt auctions. Negotiated offering ✔ when the brokerage underwriting department negotiates on the

• Type of security
• Price, interest, valuation
• Special features or protective provisions Authorized shares ✔ the maximum number of shares a corporation may issue as indicated in the corporate charter.

Issued shares ✔ authorized shares that have been sold by a corporation (can = outstanding, if company has not bought back any shares). Outstanding shares ✔ the total number of shares of stock that are owned by stockholders on any particular date. Preliminary prospectus ✔ "red herring"

• Excludes final price
• Subject to the passport system
• Submitted for review Prospectus ✔ contains full, true, and plain disclosure of all material facts related to the securities offered. Short-form prospectus ✔ used by senior reporting issuers who make continuous disclosure. Excludes information about the company, and instead focuses on the security itself. After-market stabilization ✔ a type of arrangement where the dealer supports the offer price of a newly issued stock once it begins trading in the secondary market. Greenshoe option ✔ an IPO over-allotment option that allows for underwriters to issue more of the underlying firm's stock. Bought deal ✔ when one dealer buys the entire issue and acts as a principal. Can take a lower spread (between the dealer's cost and the final selling price). Delayed opening ✔ the postponement of trading of an issue on a stock exchange beyond the normal opening of a day's trading because of market conditions that have been judged by exchange officials to warrant such a delay. Reasons for a delay might include an influx of either buy or sell orders, an imbalance of buyers and sellers, or pending corporate news that requires time for dissemination Suspension in trading ✔ an interruption in trading imposed on a company if their financial condition does not meet an exchange's requirements for continued trading or if the company fails to comply with the terms of its listing agreement.

Competitive bidding ✔ a selection process in which suppliers submit bids to win the buyer's business. The submitted bids are accepted in rising order of yield until the full amount has been allocated. Escrowing shares ✔ shares held by an independent trustee, and ties the value of shares held by shareholders to the value of what happens to the property used to obtain these shares. It ensures stability by preventing owners to sell shares before a proper market can develop. Greensheet ✔ an information circular (for in-house use) that informs salespeople about the advantages/disadvantages of a new issue that will go public.