CSC1 Canadian Securities Course Exam 1 Questions and Answers

The shares held by institutional investors, along with other shares available for trading by the public, are referred to as thepublic float shares. These are the issued shares of a company that are actively traded in the market, excluding restricted shares held by insiders or strategic investors.

Other options:

Issued shares: Includes all shares a company has issued, including restricted shares.

Outstanding shares: Includes all shares held by all shareholders, including restricted shares and shares not available for trading.

Market capitalization shares: Not a term used to describe shares; market capitalization is a measure of a company's total value based on its stock price and outstanding shares.

References:

Volume 1, Chapter 8:Equity Securities, section on "Public Float and Market Capitalization" explains the concept of public float shares​.

Chartered banks are generally considered primary derivative dealers in the over-the-counter (OTC) markets. They act as intermediaries and market makers for derivatives like swaps, options, and forwards, facilitating trades between other financial institutions, corporations, and investors.

Their extensive resources, expertise, and regulatory compliance capabilities make them dominant players in the OTC derivatives market.

Study Document References:

Volume 1, Chapter 10:Primary Derivative Dealers and OTC Markets, explaining the role of chartered banks in derivatives​​.

TheMontreal Exchange (MX)is the sole Canadian exchange that lists and trades all financial and equity futures and options. It is a derivatives exchange specializing in these products and is part of the TMX Group.

A. ICE NGX Canada: This platform focuses on energy products like natural gas and electricity, not equity futures or options.

B. Canadian Securities Exchange: This exchange supports small-cap stocks but does not deal with derivatives.

D. Toronto Stock Exchange: This exchange lists equities and some other securities but does not specialize in trading futures or options.

TheCanada Deposit Insurance Corporation (CDIC)insures eligible deposits (e.g., term deposits) up to a maximum of$100,000 per depositor per member institution. In this case:

Keith has $150,000 in ABC Trust Company → $100,000 is insured.

Keith has $75,000 in XYZ Trust Company → Entire $75,000 is insured.

Total insured amount = $100,000 (ABC) + $75,000 (XYZ) = $200,000.

References:Volume 1, Chapter 3 ("Investor Protection Funds and Insurance")​.

Dividends are taxed at a preferential rate in Canada due to thedividend tax credit, which reduces the effective tax rate on dividend income. This is intended to prevent double taxation because corporations have already paid taxes on their profits before distributing dividends to shareholders.

B. Dividends from preferred shares are ineligible for the dividend tax credit: This is incorrect; dividends from both common and preferred shares are eligible for the dividend tax credit.

C. Stock dividends are treated differently than regular cash dividends for tax purposes: Stock dividends are generally taxed similarly to cash dividends.

D. Reinvested dividends are non-taxable to the shareholders: Reinvested dividends are taxable in the year they are earned, even if reinvested.

A stock split reduces the price per share, making the shares more affordable to smaller or retail investors. This does not increase the market capitalization or shareholder value but makes trading easier by improving liquidity and accessibility.

References:

Volume 1, Chapter 8:Equity Securities, section on "Stock Splits and Consolidations," describes the purpose and benefits of stock splits for investors, particularly in terms of affordability and liquidity​.

Aninvestment bankerin a sell-side firm is responsible for structuring new debt issues and bringing them to the primary market. This involves determining the appropriate structure for the debt offering, pricing it based on market conditions, and marketing it to potential investors. Investment bankers play a key role in the capital-raising process for issuers.

References:

Volume 1, Chapter 1:The Canadian Securities Industry, section on "The Role of Investment Dealers," outlines the roles of investment bankers in the primary markets, including structuring and underwriting securities​.

The FTSE Canada Universe Bond Index represents a comprehensive cross-section of investment-grade government and corporate bonds denominated in Canadian dollars. It includes bonds with a term to maturity of one year or more and excludes high-yield (non-investment-grade) bonds.

A. It measures the total price return on bonds including realized and unrealized gains: The index does not account for realized gains; it tracks price movements and interest income.

C. It includes Canadian investment-grade bonds with a term to maturity of one year or less: Bonds in this index must have a term to maturity of at least one year, not less.

D. It is an equal-weighted bond index with each bond representing the same weight within the index: The FTSE Canada Universe Bond Index is capitalization-weighted, not equal-weighted.

The description of a company's fixed assets, including details about their nature, valuation methods, and depreciation, is typically found in thenotes to the financial statements. Thesenotes provide additional context, explanations, and details about the figures presented in the financial statements. The statement of financial position will list fixed assets, but the comprehensive description is found in the notes.

References:

Volume 1, Chapter 11:Corporations and Their Financial Statements, section on "Notes to the Financial Statements" describes how notes are used to provide critical details about items in the financial statements, including fixed assets​.

Futures contracts are standardized agreements to buy or sell an asset at a predetermined price on a future date. They are unique because they can be traded on regulated exchanges, such as the Chicago Mercantile Exchange (CME), or over-the-counter (OTC), where counterparties negotiate terms directly.

This dual trading mechanism ensures flexibility and accessibility for market participants, differentiating futures from other derivatives like forwards, which are typically OTC-only.

Study Document References:

Volume 1, Chapter 10:Derivatives and Features of Futures, including how they are traded​​.

When foreign interest rates rise, capital may flow out of Canada as investors seek higher returns abroad. To counter this, the Bank of Canada may increase short-term interest rates to make Canadian assets more attractive and maintain the value of the Canadian dollar. This helps stabilize the exchange rate and reduces the risk of imported inflation.

Such actions demonstrate the central bank's role in managing monetary policy to preserve economic stability and maintain currency confidence.

Study Document References:

Volume 1, Chapter 5:Monetary Policy and the Role of the Bank of Canada​​.

When acting as aprincipal, investment dealers buy and sell securities for their own account. They generate revenue by earning aspread, which is the difference between the price at which they buy securities (bid price) and the price at which they sell them (ask price). This is distinct from their role as an agent, where revenue is earned through commissions on trades executed on behalf of clients.

A. Through commissions: Commissions are earned when acting as an agent, not as a principal.

B. Through tracers: This term does not apply to revenue generation.

C. Through brokerage charges: Brokerage charges relate to fees imposed on client accounts, not principal trading spreads.

The normal shape of a yield curve is anupward slope, indicating that longer-term bonds offer higher yields than shorter-term bonds. This reflects the additional risk and time value of money associated with longer maturities.

A. Downward slope: This could describe a yield curve during unusual circumstances, such as a period of market uncertainty or deflation.

B. Inverted: An inverted yield curve, where shorter-term yields exceed longer-term yields, is a rare occurrence and often signals economic recession.

D. Humped: A humped curve is rare and occurs when intermediate-term yields exceed both short-term and long-term yields.

When the public distribution of a security drops to an unacceptably low level, the exchange may consider delisting the security. This action ensures that the securities listed on the exchange meet minimum requirements to maintain market integrity and liquidity. Delisting is a permanent measure and typically occurs after other corrective actions fail, such as halting or suspending trading.

A rate-reset preferred share pays a fixed dividend rate that is periodically reset based on a predetermined benchmark, such as the yield to maturity on the five-year Government of Canada bond, plus a fixed spread. This type of share offers a balance between fixed-income predictability and adjustments for changing interest rates.

References:

Volume 1, Chapter 8:Preferred Sharesunder "Types of Preferred Shares" explains rate-reset preferred shares and their connection to benchmark yields like the five-year Government of Canada bond (CSC Volume 1, Chapter 8)​.

Bond indexes are widely used in the securities industry to constructbond index funds, which aim to replicate the performance of the bond market or a specific segment of it.

A (Provide liquidity)refers to market-making activities, not bond indexes.

B (Direct purchase)is uncommon, as bond indexes are benchmarks rather than individual investments.

D (Assess credit risk)is achieved through credit rating agencies, not bond indexes.

References:Volume 1, Chapter 7 ("Bond Indexes")​.

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A stop buy order is used to protect a short position. This type of order instructs the broker to purchase a security if its price rises to a specified level, limiting the short seller's potential loss. It is triggered when the price reaches or surpasses the set stop price, helping the short seller exit the position to avoid unlimited losses.

Study Document References:

Volume 1, Chapter 9:Order Types and Protecting Short Positions, discussing how stop buy orders function for short sellers​​.

In Canada, retail stock and bond transactions are settled through aclearing corporation, such as the Canadian Depository for Securities (CDS). The clearing corporation ensures that transactions are accurately settled according to the dealers' records.

Exchanges facilitate the trading process but are not directly responsible for settling transactions (A, D).

The clearing corporation settles transactions based on dealer records, not exchange records (B).

References:Volume 1, Chapter 7 ("Clearing and Settlement")​.

Theright of rescissionallows a purchaser to cancel their purchase if the prospectus contains amisrepresentation. This statutory right protects investors by ensuring that they are not bound by transactions based on incorrect or misleading information. Under Canadian securities law, the right of rescission is an important safeguard to maintain market integrity and investor confidence.

This right is distinct from theright of action for damages, which allows investors to sue for compensation, and theright of withdrawal, which permits cancellation within a limited time after agreeing to the purchase, typically two business days.

References:

Volume 1, Chapter 3:The Canadian Regulatory Environment, section on "Rights of Purchasers" describes the statutory rights related to prospectuses and their misrepresentations​.

A unique risk associated with short selling is the potential for unlimited loss. When a short seller borrows and sells a security in anticipation of its price falling, they must later buy it back to return it to the lender. If the security's price rises instead of falling, there is no theoretical limit to how high the price can go, leading to unlimited losses for the short seller.

This differs from long positions, where the maximum loss is limited to the initial investment amount.

Study Document References:

Volume 1, Chapter 9:Short Margin Accounts, including the mechanics and risks of short selling​​.

Determining the present value of a bond involves discounting the future cash flows (coupon payments and the principal repayment at maturity) back to the present using an appropriate discount rate. The first step in this process is to identify the correct discount rate, which reflects the bond's required rate of return or the prevailing market interest rate for bonds with similar risk and term characteristics.

The appropriate discount rate accounts for factors such as the bond's credit risk, term to maturity, and prevailing economic conditions. Once the discount rate is determined, the present value of the coupon payments and the principal amount can be calculated.

Study Document References:

Volume 1, Chapter 7:Calculating the Present Value of Bonds, including concepts of discount rates and how they affect bond pricing​​.

Defined contribution (DC) plans have driven the demand for cost-effective, diversified, and easily tradeable investment products like exchange-traded funds (ETFs). Unlike defined benefit plans, where the employer guarantees payouts, DC plans place the responsibility for investment decisions and risks on individuals, who increasingly opt for ETFs for their low costs and broad market exposure.

A. The rise of financial technology companies: While fintech has contributed to the growth of investment products, it is not a primary driver of ETF usage.

C. The emergence of cryptocurrency: Cryptocurrencies are separate financial products and are not directly tied to the use of ETFs.

D. The popularity of robo-advisors: Robo-advisors use ETFs extensively, but this is a result of their popularity rather than a cause of ETF growth.

Aninterest rate forward agreement (FRA)is anover-the-counter (OTC)derivative contract. Unlike exchange-traded derivatives, OTC contracts are not centrally cleared, meaning there is no intermediary to guarantee performance. This increases counterparty (default) risk, making FRAs inherently riskier than exchange-traded contracts.

A. Individual investor buying shares on an exchange during the ex-rights period: This is a standard transaction involving equity securities, not derivatives, and carries no default risk.

C. Exchange-traded equity option contract between an individual investor and a dealer: Exchange-traded derivatives are backed by a clearinghouse, which mitigates default risk.

D. Individual investor entering a futures contract with an institutional investor: Futures contracts are also exchange-traded and centrally cleared, reducing default risk.

Treasury bills (T-bills) are short-term fixed-income securities issued by the Government of Canada with maturities of one year or less, including terms as short as six months or less. They do not pay interest in the conventional sense. Instead, they are sold at a discount to their facevalue, and investors receive the full face value upon maturity. The difference between the purchase price and the face value represents the investor's earnings.

A. Guaranteed bonds: These are long-term securities that pay periodic interest (coupons) and do not fit the short-term, non-interest-paying description of T-bills.

B. Commercial paper: Issued by corporations, not governments, and used to finance short-term liabilities.

D. Term deposits: These are bank products, not government securities, and typically pay interest over their term.

When an investor feels unfairly treated by a stockbroker, and the issue is not resolved through direct discussion with the member firm, the next step often involves pursuing a formal dispute resolution mechanism. The options available in the Canadian securities industry for handling such disputes include:

Rescission of the objectionable trades:

This would involve canceling or reversing the trades in question. However, rescission is rarely granted and typically occurs only if there is clear evidence of fraud or legal impropriety. It is not the best initial course of action for dispute resolution.

Payment from the Canadian Investor Protection Fund (CIPF):

The CIPF protects clients of member firms in the event of the firm’s insolvency, not disputes over trades or treatment by a broker. Therefore, this is not applicable in this case.

Independent arbitration:

Arbitration is a widely recognized method of resolving disputes in the securities industry. It involves an independent arbitrator reviewing the case and issuing a binding decision. It is particularly suitable for cases where discussions between the investor and the firm have not resolved the issue.

Investigation by the Ombudsman for Banking Services and Investments (OBSI):

OBSI offers a dispute resolution service for clients of financial institutions, including investment dealers. However, OBSI’s findings are non-binding, meaning they cannot compel the member firm to act or pay compensation. Arbitration, on the other hand, provides a binding resolution.

Why Arbitration is the Best Option:

Independent arbitration is a more definitive course of action because it results in a binding decision that both the investor and the broker must adhere to. Arbitration is designed to handle precisely the type of disputes described in the question and ensures a fair process overseen by an impartial third party.

References:

Canadian Securities Course Volume 1:

Section on Dispute Resolution and Investor Protection: Arbitration is discussed as a key method for resolving disputes where the investor seeks a binding resolution​.

Role of the Canadian Investor Protection Fund: The CIPF is explained as providing coverage for insolvency, not dispute resolution​.

Role of the Ombudsman for Banking Services and Investments (OBSI): OBSI is explained as offering non-binding recommendations, making it less suitable for cases where binding decisions are needed​.

True inflation is defined as a general and sustained increase in the prices of goods and services throughout an economy over time.

A (Jump in call prices)andD (one-time price increase due to tax)are isolated events and not inflation.

B (Sustained decrease in prices)describes deflation, not inflation.

References:Volume 1, Chapter 4 ("The Impact of Inflation")​.

One advantage of public listing is the goodwill generated among shareholders. Public listing enhances the company's visibility, credibility, and reputation, which can attract investors, customers, and business partners. This goodwill often facilitates access to capital and strengthens the company's market presence.

Study Document References:

Volume 1, Chapter 12:Advantages of Public Listing, outlining benefits such as goodwill and increased capital access​​.