Download CSC Exam 1 With 100% Correct And Verified Answers 2024 and more Exams Advanced Education in PDF only on Docsity! CSC Exam 1 With 100% Correct And Verified Answers 2024 Bond - Correct Answer-long-term, fixed obligation debt security that's secured by physical assets (can be seized if you don't pay) Debenture - Correct Answer-bond promises repayment of regular interest and repayment of principal at maturity, secured by something other than physical asset or a claim on issuer's credit rating Coupon Rate - Correct Answer-rate of interest that appears on the certificate of bond Liquid Bonds - Correct Answer-bonds trade in significant volumes for which it's possible to make med and large trades quickly w/o making significant sacrifice on price Face/ Par Value - Correct Answer-stated value of bond and amount issuer will pay at maturity Marketable Bonds - Correct Answer-Ready market bonds. Specific maturity date and interest rate. Transferrable (can be traded in mkt) Extendible Bonds - Correct Answer-bond or debenture issued with short term maturity but with an option for investor to exchange debt for identical amount of longer term debt at same or higher rate of interest. Retractable Bonds - Correct Answer-A bond or deb usually issued with a long term to maturity but gives investors right to redeem bond at par several years sooner Convertible bonds and debentures - Correct Answer-combines certain advantages of bond with option of exchanging bond for common shares. This type of security allows investor to lock in specific price for common shares of company Treasury Bills - Correct Answer-Short-term gov obligations offered in denominations from $1000-1mil No interest Issued at discount to par and mature at full par At maturity, holder gets diff between issue price and par and return is in form of interest income, no cap gain Canada Savings Bond - Correct Answer-non-transferrable cashable by owner at any time at full par plus accrued interest for each full MONTH available thru Payroll Canada Premium Bonds - Correct Answer-higher IR than CSBs cashable by owner at any time at full par plus accrued interest earned up to last anniversary date of issue at time of redemption - can purchase thru financial institutions Real Return Bonds - Correct Answer--pay interest throughout life of bond and repay original principal amount at maturity -coupon payments and principal repayments are adjusted for inflation based on CPI - good if inflation is expected to increase (inflation protection) Provincial Bonds - Correct Answer-issue fixed income securities for same reason as fed, to finance program spending and to fund deficits debs, promises to pay and their value depends on province's ability to pay interest and repay principal. coupon payments backed by provincial tax revenues Municipal Debentures - Correct Answer-installment debentures or serial bonds to raise money from capital markets municipal securities are non-callable, and part of the bond matures each year of the term of the bond Corporate Bonds - Correct Answer-to finance growth, expand operations, buy another company. risk reflected in credit rating given the issue, which takes into account not just company reputation, but also the way bonds secured. Mortgage Bonds - Correct Answer-lender secures property if borrower fails to repay First Mortgage Bonds - Correct Answer-senior securities of company b/c constitute 1st charge on company's assets, earnings, and undertakings before unsecured current liabilities are paid. Collateral Trust Bonds - Correct Answer-Secured by pledge of real property, as in a mortgage bond, but a pledge of securities. Usually issued by company w/o a lot of fixed assets Equipment Trust Certificates - Correct Answer-pledge equipment as security instead of real property Subordinated Debentures - Correct Answer-junior to other securities issued by company or debts assumed by company. Corporate Notes - Correct Answer-unsecured promises made by borrowers to pay interest and repay funds borrowed at specific date or dates. lowest rank DBRS rating of A - Correct Answer-more susceptible to adverse trade or economic conditions relative to higher grade bonds Present Value - Correct Answer-Today's value of an amount to be received in the future. What is the PV of $1000 bond with no coupon at a discount rate of 5% to be received in one year? - Correct Answer-PV= 1000/1.05= $952.38 Coupon Payments - Correct Answer-fixed amounts of interest paid by bond issuer to bondholder during life of a bond What is the PV of $1000 bond with no coupon at a discount rate of 5% to be received in 2 years? - Correct Answer-PV= Future Value / (1+ discount rate)^n = 1000/ (1.05)^2 = 907.03 Semi-annual Calculations - Correct Answer-PV= Future Value / (1+ (discount rate/2))^n coupon payments are made every 6 months/ discount rates are annual Calculate the present value: Future $1050 DR 7% - Correct Answer-PV= 1050/ (1+(7/2)) = 1050/1.035 =981 Calculating bond price - Correct Answer-PV of a Bond= PV of Coupon Payments + PV of Principal Steps to calculate bond price - Correct Answer-1. Choose DR 2. Calc PV of bond's principle to be received at maturity 3. Calc PV of bond's income stream (coupons) 4. Add the 2 PVs together to get today's worth PV? Bond: 10 year, 7% GoC semi-annual bond, $1000 face value, w 4 years remaining to maturity. 5% coupon rate. - Correct Answer-PV= 1000/ (1+2.5%)^8 (4 years of semi annual) = 1000/1.2184 =$820.75 Bond: 10 year, 7% GoC semi-annual bond, $1000 face value, w 4 years remaining to maturity. 5% coupon rate. - Correct Answer-- 4 years til maturity - bond pays 7% annually on $1000 face value (0.07x1000) or $70 - bond pays interest twice a year - dr is 5% Yield Calculation - Correct Answer-Yield= 100-Price/Price x 365/term x 100 Current Yield - Correct Answer-= (annual cash flow/current market price) x 100 Yield to Maturity (YTM) - Correct Answer-total return you expect over life of bond starting today Reinvestment risk - Correct Answer-risk coupons can't be reinvested at same IR that prevailed at time of bond purchase Zero Coupon Bond - Correct Answer-no reinvestment risk purch at discount from face value Real Rate of Return - Correct Answer-- inflation decreases value of CAD $ - return received must be reduced by inflation to give actual/real rate of return Nominal Rate - Correct Answer-= Real Rate + Inflation Rate Factors affecting IR - Correct Answer-- recession: demand for funds decr and IR decr - once IR decr enough, funds rise again Yield Curve Theories - Correct Answer-Expectations: implies shape of yield curve indicates investor expectations about future IRs Liquidity Preference: investors prefer short term bonds b/c more liquid and less volatile Mkt Segm: reps supply and demand for bonds of various terms, influenced by big players in each sector As yields/ IRs increase - Correct Answer-bond prices fall As IRs increase - Correct Answer-yields of competing investments increase Whats more volatile? Short term or long term bonds - Correct Answer-long term bonds Whats more volatile? Lower-coupon or higher coupon bonds - Correct Answer-lower coupon Whats more volatile? low IRs or high IRs - Correct Answer-bond price is more volatile when IRs are low Duration - Correct Answer-measure of sensitivity of bond's price to changes in IRs. Defined as approx % of price/value of bond for 1% change in IR To protect from IR increasing, invest in - Correct Answer-lower duration bond To gain greater ROI if IRs decrease, invest in - Correct Answer-higher duration bond Sell side - Correct Answer-fixed income trading is investment dealer side trading of inv products for own accounts roles: inv banker, trader, sales rep Buy side - Correct Answer-fixed income trading is inv mgmt side asset mgmt, buy and sell on behalf of client roles: portfolio manager and trader Firm w Large Institutional Dealing Desk - Correct Answer-IAs serviced by retail trading desk access to wide range of securities in inventory Firm w/o Large Institutional Dealing Desk - Correct Answer-IAs are served by trading desk as source of product Desk must build inventory Investment dealer brokers - Correct Answer-Whole sale bond market Agents that match buys and sells Anonymity of client Trade ticket - Correct Answer-electronic confirmation sent thru secure, proprietary systeCm Clearing + Settlement - Correct Answer-when security trxn confirmed, change in legal ownership effective immediately deliver/payment of purchased security doesn't have to be made till settlement Settlement Periods - Correct Answer-GoC T-Bills= same day GoC </= 3 yrs= 2 days GoC > 3 yrs= 3 days Accrued Interest - Correct Answer-amount of interest built up during previous holding period paid at purchase from buyer to seller for previous holding period Ex. 8% GoC due Mar.15 2020. Principal $200,000. Purchased Tues. May 6 and last coupon payment was Mar.15 - Correct Answer->3yr so 3 days to settle (May 9) Calc from Mar.16-May 9= 55 days $200,000 x 0.08 x 55/365 = $2410.96 Canadian Bond Market Indexes - Correct Answer-PC Bond FTSE TMX Canada Universal Bond Index Global Bond Indexes - Correct Answer-Barclays Foreign Pay Preferreds - Correct Answer-- favoured by Canadian investors resident in different countries - div income will increased if CAD $ falls Preferred Shares Features - Correct Answer-- Voting privileges: mostly all pref shares are non-voting, privileges assigned if company fails to pay pref divs - Cumulative Dividends: unpaid divs accumulate as arrears, that must be fully paid before div payments resume - Callable and purchase funds: company has right to call or redeem pref shares and may use a purchase fund to redeem a specified # of shares each year if they are at or below a certain price Participating - Correct Answer--pay stipulated dividend -give holder right to participate w common holder in earnings of company and above the specified div rate of prefs Deferred - Correct Answer-- don't pay a dividend until present maturity date, thus deferring taxes - if held to redemption, accrued divs are fully taxable as interest income, making them suitable for registered accounts - if sold prior to redemption, treated as a capital gain (or loss), therefore particularly suitable for non-registered accounts Purchase Fund - Correct Answer-- Supports the market price of the preferred shares - Fund requires issuing company to allocate earnings each year to a fund, may be used to later redeem a portion of outstanding shares at market price or sinking fund price. - As total # of outstanding shares is reduced, position of remaining shareholders is strengthened. Stock Indexes vs Stock Averages - Correct Answer-Indexes - value weighted according to mkt capitalization - stocks are included based on equity mkt values of underlying companies - each stock has relative weight based on stock's market capitalization - higher market cap dominates Averages - price-weighted, movements in average are tied directly to changes in prices of stocks included in the group - stocks are included in proportions based on their quoted market prices - stock trading at $100 will then make up 10 times more of total index than stock trading at $10 - high price stocks dominate S&P/TSX Composite Index - Correct Answer-◦Weighted by market value ◦Stocks must meet specific listing requirements to be included in the index ◦The stocks included in the index are classified into 10 industry sectors S&P/TSX 60 Index - Correct Answer-◦Weighted by market value ◦Includes the 60 largest stocks of the S&P/TSX Composite Index ◦The index has 10 sectors that cover all S&P/TSX subgroups ◦All stocks listed in this index must also be listed in the Composite Index S&P/TSX SmallCap and MidCap Indexes - Correct Answer-◦Weighted by market value ◦MidCap includes the next 60 largest stocks to those in the S&P/TSX 60 ◦SmallCap includes the remainder of the stocks in the S&P/TSX Composite ◦All stocks listed in these indexes must also be listed in the Composite Index S&P/TSX Venture Composite Index - Correct Answer-◦Weighted by market value ◦Used as a benchmark for the venture capital marketplace for companies listed on the TSX Venture Exchange Dow Jones Industrial Average (DJIA) (USA) - Correct Answer-◦Weighted by price ◦Tracks the performance of 30 blue-chip stocks ◦The average tends to underperform the broader market over the long term S&P 500 (USA) - Correct Answer-◦Weighted by market value ◦Used to gauge the performance of the broader market ◦Includes industrial, financial, utility and transportation stocks Nasdaq Composite (USA) - Correct Answer-◦Weighted by market value ◦Includes more than 3,000 stocks that are traded over the counter ◦The index is dominated by smaller capitalization stocks Index Value - Correct Answer-Index Value = (Aggregate Quoted Market Value / Base Value) x 1000 Year over year change in S&P/TSX Composite Index - Correct Answer-ex. 2007 = 13430 2006= 12200 13430-12200/12200= 10.08% Daily Average - Correct Answer-Price Stock 1 + 2 + 3.../Divisor - 30 stocks used in DJIA ABC has 50 mil shares at $75 and DEF has 100mil at $50. Who has higher weighting on index? - Correct Answer-ABC bc higher price has more influence Which company would have a stronger effect on the performance of the index? Company A: 100,000 at $25 Company B: 500,000 at $12 Company C: 650,000 at $18 Company D: 800,000 at $15 - Correct Answer-Company D because it has the highest market capitalization of 800,000 x 15= $12 million FTSE 100 Index Fund. - Correct Answer-Consists of 100 largest listed companies by market capitalization in the UK. Diff between S&P 500 and Dow Jones Industrial Average - Correct Answer-S&P 500 is broad-based, value weighted index that is used as an indicator for market performance DJIA includes only 30 large, blue chip stocks, not used for performance of broader market. DDR and FFD are both part of stock index. DDR, trade at $40 a share, has a market cap of $240 million while FFD, trade at $20 has a market cap of $1.4 trillion . At end of trading day, FFD has gone up by 10%, while DDR down in price by 10%. Assume that all other stocks in the index didn't move that day, where will the index close? - Correct Answer-The index will close up from the day before as FFD has a higher market capitalization. In a value-weighted index, such as the S&P/TSX Composite Index or the S&P 500, companies with large market capitalizations dominate changes in the value of the index over time. Thus a change in the market capitalization of a large company will have a greater impact on the value of the index than a comparable change in the market capitalization of a smaller company. Jarod is planning on buying 1,000 shares of WIT Inc. On Monday morning he reads that WIT just announced a dividend with a record date of the following Monday. Jarod is hoping to earn capital gains from this investment rather than dividends. When should he buy the shares? - Correct Answer-Thursday To determine whether the seller or the buyer's entitled to dividend when sale takes place around time of dividend payment, stock exchange names an ex-dividend date. On/after this date, stock sells ex-dividend; that is, seller retains dividend and buyer is not entitled to it. Ex-dividend date's set at 2nd business day before dividend record date. Since trades settle on 3rd business day after trade, purchaser of shares 2 days before record date wouldn't have trade settle until day after record date, and would thus not be a shareholder of record for purposes of receiving the dividend. If Jarod doesn't want dividend he should buy them on the ex-dividend day - Thursday as he will not own them until the following Tuesday and will not be eligible for the dividend. What is happening when the price of a company's common shares rises above its convertible preferred conversion price? - Correct Answer-The price of the convertible preferred mirrors the common shares. type of preferred shares that pay a fixed dividend for a pre-determined amount of time and then a variable dividend - Correct Answer-Fixed-reset preferred shares Entitle holder to fix div for predeter period of time after which div becomes variable At $11, the max loan value increases to $2,750 (50% × $11 × 500) and revised margin is now $2,250 ($5,000 - $2,750). Given that Robert originally made a deposit of $2,500, the account shows an excess margin of $250 ($2,500 - $2,250 = $250). If he keeps $2,500 in account, account shows loan value of $2,750, req margin of $2,250, and excess margin of $250. Shares of DEF have dropped by $1.00 in the past week and are now trading at $24. One week ago Sally sold short 500 shares, which were not eligible for a reduced margin. What is her present account status? - Correct Answer-Sally does not need to deposit anything into her account because her short sale was made on the belief that the price of DEF would decline, and it has, producing an excess margin of $750 in her account: Original minimum account balance: 500 × $25 × 150% = $18,750 (based on original price of shorted security) Less: Current minimum account balance: 500 × $24 × 150% = $18,000 Equals: Excess margin: $18, 750 - $18,000 = $750 Rob bought on margin 500 shares at $10. It closed at $9. How much to cover deficiency? - Correct Answer-500 x 10 = 5000 500 x 9 = 4500 deficiency = 500 True about cash accounts - Correct Answer-- settlement date for buys/sells are mandated by industry rules - inv dealers are prohibited from granting credit in client cash accounts - delinquent cash accts may become restricted from trading False about cash accounts - Correct Answer-- investment dealers are prohib from using uninvested funds held in cash acct for own business purposes - aka free credit balances, payable on demand by clients In a short sale - Correct Answer-investor is depositing 50% extra assets to cover increased risk associated w short sale trxn Stop buy order - Correct Answer-protect from unexpected upward move in price reducing price of stop buy order as price of shares drops to decrease risk of large losses Elements of a trade order - Correct Answer-price and time - price: if not specified, the order is considered a market order. If there's a specific price or better that client sets it is a limit order - time: if client does not specify time restriction, order is a day order. If they specify a cancel date, order is a good thru order w regard to time Interest on margin loan - Correct Answer-calculated daily on debit balance in account and charged monthly. Client order must be filled before - Correct Answer-non-client order Margin means - Correct Answer-amount of funds investor must provide to buy securities on margin Agency transaction - Correct Answer-client phones investment advisor w order, who in turn executes order on client's behalf and charges him/her commission Investors buying stocks typically need to settle security transactions w brokerage firms w/n what time frame? - Correct Answer-3 business days after trade was executed Derivatives for Risk Mgmt - Correct Answer-Safeguard portfolio against sudden drop in mkt Derivatives for Speculative Strategy - Correct Answer-A way to increase ROI Instit Investors that use Derivatives - Correct Answer-- mutual/hedge/pension fund managers and insurance companies Hedging (risk reduction) - Correct Answer-- Reduces downside risk, either in indiv stock or in a portfolio, that's related to economic outlook, such as IR movement or company- specific event - Hedging is attempt to elim/ reduce risk of either holding an asset for future sale or in anticipating a future purchase of an asset Speculating - Correct Answer-involves establishing a position from which to profit from expectations for prices at some point in future Buying options - Correct Answer-pay premium for right to sell at a designated price aka strike price Sellers of options - Correct Answer-receive premium for obligation to b/s underlying security at strike price if called on to do so Buyer (long position) - Correct Answer-Call buyer: pays premium for right to buy underlying security at designated price Put buyer: pays premium for right to sell underlying security at designated price Sell or writer (short position) - Correct Answer-Call writer: receives prem for oblig to sell at designated price Put writer: receives premium for obligation to sell underlying security at designated price Strike Price/Exercise Price - Correct Answer-price which underlying assets are bought or sold Option Expiry - Correct Answer-holders may exercise rights and writers must meet obligations (if called on) under the contract on or before this date In the money - Correct Answer-- call option ITM if strike price is lower than mkt price of underlying asset - buyers right to buy security at a price below its current price is an immediate advantage - put option is ITM if strike price is higher than mkt price of underlying asset - right to sell at price higher than its current value At the money - Correct Answer-strike price is equal to current price of share Out the money - Correct Answer-- call option: strike price is higher than market price - put option: strike price is lower than market price - no immediate benefit to sell at lower price than mkt or to buy at a higher price than market American-style options - Correct Answer-- right to exercise it on/at any time before expiration date - option writer can be assigned at any time, either when or before option expires - generally equity options European-style options - Correct Answer-- can only be exercised during specific period of time just prior to expiration - writer runs risk of being assigned only during specific time period, not before then - generally index options October 30 call $3.45 with current mkt price of $32 - Correct Answer-- exercise price is $30, $2 less than current stock price Put - Correct Answer-Sell Call - Correct Answer-Buy Opening Transaction - Correct Answer-- one that adds/ creates new option trading position - can be a purchase or a sale 3. performance bond required: good-faith deposit gives other side of trxn hi level of confidence in contract Diffs b/w options and forwards - Correct Answer-holder's rights or obligation w/n contract - opt has right to b/s - forwards are oblig (risky) strike price - opt strike price specified in contract - forward contracts have no strike price costs - premium for opt - only good-faith deposit Do derivative products create risk? - Correct Answer-No they transform or transfer it b/w counterparts Equity put and call option contracts rep - Correct Answer-100 shares Gregoire has $20,000. LEV's trading at $50/share. LEV warrants are trading at $10/warrant with exercise price of $45. Makes purchase and shares subsequently go up to $55. Then closes out position. Calc return on investment if he chooses to use leverage in this purchase to increase his return. - Correct Answer-50% Main attraction of warrants is their leverage potential. Mkt price of warrant is usually much lower than price of underlying security, and generally moves in same direction at same time as price of underlying. Capital appreciation of warrant on % basis can thus greatly exceed that of underlying security. Gregoire would have bought warrants at $10. He could have bought 2,000 warrants. When stock went up by $5.00, warrants would have increased by $5.00 too. Would have made a profit of 2,000 x $5 = $10,000, a 50% return. If he had bought the shares, he would have made $2,000 ((55 - 50)x 400)/20,000 = 10% XYZ Company declares a rights offering to shareholders of record as of Friday, September 15th. Two rights are required to purchase 1 new share at a subscription price of $10. The rights offering expires on Friday, October 15th. Given the following stock prices, what would be the theoretical intrinsic value of the right during the last day of the cum rights period? - Correct Answer-1st identify last day the share trade cum rights. Recall that shares trade ex-rights 2 business days prior to record date (Friday, Sept. 15), therefore last day in cum rights period would be Tuesday Sept. 12, ($15.50). To calculate theoretical value of a right during the cum rights period: Mkt price of stock minus Subscription price Number of rights needed to subscribe for one share plus one $15.50 - $10/2+1 = $1.83 An investor writes one XYZ Apr 40 uncovered call for $3.40. At expiry the stock price is $50 and the writer is assigned. What is the gain or loss for the writer? - Correct Answer- Loss $660 Writer earned $3.4x100= $340 from call prem At expiry lost $10x100=$1000 $1000-$340=$660 What has highest premium? - Correct Answer-In the money call option contracts b/c it already realizes the imbedded value Bob thinks price of stock will drop for 6 months. - Correct Answer-Write a call If declines, he will not be assigned and can keep premium w/o further obligation Example of hedger in futures mkt - Correct Answer-doctor buys oil futures b/c of expected oil shortages An investor purchases an ABC Nov 50 call for $5.75 when the market price of the stock is $55. If the market price of the stock increases to $58 the next day, what will be the approximate option premium? - Correct Answer-$8.75 $58-$50=$8 Time Val= 5.75-5=0.75 $8+$0.75=$8.75 Partnership - Correct Answer-- coming togeth or 2 or more sole proprietors by virtue of their supplying funds and/or expertise - general partners involved in daily business operations & jointly liable for all obligs of biz and personal assets - easier and cheaper to maintain, less regul, loose struc, doesn't require biz representatives, specialized record keeping or sep tax returns Corporation - Correct Answer-- distinct legal entity sep from ppl who own stock - corp owns assets of biz and is liable for all - obligs of biz, incld right to be sued - assets of common stkholders are never - accessible to satisfy any claims that arise as result of biz activities What is an IPO? - Correct Answer-Initial public offering. Security offered is brand new/different. Raising capital by issuing debt or allowing investors to participate in company's fortunes by means of equity ownership thru issue of common stock. Purpose of a Prospectus - Correct Answer-- full, true and plain disclosure of all material facts - prospectus system reqs issuing company and underwriter to submit to prov securities regulators detailed descriptions of sec being offered, company history, operations, mgmt, risk etc. When securities of a company listed on a stock exchange are distributed through the facilities of a Canadian stock exchange, what form of disclosure is required? - Correct Answer-Statement of Material Facts. Role of escrowed shares - Correct Answer-An incentive for an underwriter to act as a principal rather than an agent NEX - Correct Answer-New/separate board of TSX If brokers must resort to the OTC market to trade a TSX-listed stock, what form of withdrawal of trading privilege has been invoked? - Correct Answer-Suspension of trading. Echange members are usually allowed to execute orders on the suspended security in the unlisted market except for those securities suspended from trading on the TSX Venture Exchange. If a company is in financial difficulty and in negotiations with the government for concessions and a potential bailout, which of the following trading orders would most likely be implemented if the government decides to refinance the company's debt? - Correct Answer-Halt in trading - A temporary Halt in Trading is ordered to allow significant news to be reported and widely disseminated. The Canadian government's intention to refinance the debt of Air Canada and mediate with its unions could have resulted in massive buying activity on the stock. The TSX placed a Halt in Trading on the stock of Air Canada until the announcements were made and distributed through the media.