CSI 1
The Ontario web-based system to which the trades of unlisted securities are reported.
CUB - Canadian Unlisted Board
The market where newly issued securities are sold by companies and governments to investors.
Primary Market
Privately-owned computerized networks that match orders for securities outside of recognized exchange facilities. Also referred to as Proprietary Electronic Trading Systems (PETS).
ATS - Alternative Trading System
An exchange that deals exclusively with non-agricultural options and futures in Canada.
Montréal Exchange/Bourse de Montréal
Market in which securities are bought and sold by brokers acting as agents for their clients.
Auction Market
The largest stock exchange in Canada with over 1,700 companies listed on the exchange.
TSX - Toronto Stock Exchange
An auction market where byers and sellers of securities meet to trade based on the laws of supply and demand.
Stock Exchange
An individual licensed to transact in the full range of securities. The term refers to employees of CIRO member firms only. Also known as a Registrant or Registered Representative (RR).
Investment Advisor
Securities representing ownership in a company. They carry voting privileges and are entitled to the receipt of dividends, if declared.
Common Share
The highest price a buyer is willing to pay for the financial instrument being quoted.
Bid Price
Organizations, such as pension and mutual fund companies, that trade in large-share quantities or dollar amounts.
Institutional Investor
Also referred to as the unlisted market. Securities are bought and sold over-the-counter with dealers acting as principals when buying and selling securities for clients.
Dealer Market
The lowest price a seller will accept for the financial instrument being quoted.
Ask Price
That part of the capital market in which short-term financial obligations are bought and sold.
Money Market
The ability of the market for a particular security to absorb a reasonable amount of buying or selling at reasonable price changes.
Liquidity
The market where investors trade securities that have already been issued.
Secondary Market
The difference between the bid price and ask price.
Bid-Ask Spread
Canada’s public venture marketplace, the result of the merger of the Vancouver and Alberta Stock Exchanges in 1999.
TSX Venture Exchange
The person for whom a broker executes an order, or a dealer buying or selling for its own account. May also refer to a person’s capital or to the face amount of a bond.
Principal
Financial technology companies that take advantage of computer technology to support or enable a variety of financial products and services.
Fintech
The role of an investment dealer when it acts on behalf of a buyer or a seller of a security and does not itself own title to the securities at any time during the transaction.
Agent
A company that acts as an intermediary by matching investors with the users of capital.
Investment Dealer
The process of confirming and matching security trade details.
Clearing
Investment fund using proceeds from shares and units sold to investors to invest in financial securities, redeemable on demand from the fund at the current net asset value per share.
Mutual Fund
A type of bank that is federally regulated and is a foreign bank branch of a foreign institution.
Schedule III Bank
The irrevocable moment when cash and securities are exchanged.
Settlement
Policies intended to separate and isolate investment decision-making persons in a firm from others in the firm who have undisclosed material information that could influence those decisions.
Firewall
Brokerage house that buys and sells securities for clients at a greater commission discount than full-service firms.
Discount Broker or Self-Directed Broker
Shares in this investment fund type are readily transferable in the open market and are bought and sold like other shares. Capitalization is fixed.
Closed-end Fund
A type of firm that offers products and services across the financial industry and participates fully in both the retail and institutional markets.
Integrated Firm
Type of bank that is Canadian-owned and regulated by the Bank Act.
Schedule I Bank
Type of bank that is incorporated and operates in Canada as a federally regulated foreign bank subsidiary.
Schedule II Bank
A type of fund that manages a pool of assets with the goal of supplying its beneficiaries with income during their retirement years.
Pension Fund
A type of financial intermediary that purchases instalment sales contracts from retailers and dealers at a discount.
Sales Finance Company
Provides electronic clearing services; physical and electronic facilities to deposit and withdraw depository-eligible securities; management of related ledger positions.
CDS Clearing and Depository Services Inc
An online investment service that provides clients with automated investment advice.
Robo-Advisor
Who protects me if the bank goes Bankrupt
CDIC - Canadian Deposit Insurance Corporation
What if I lose money because a mutual fund dealer I invest through goes bankrupt? What organization would protect me?
CIPF - Canadian Investor Protection Fund
Who protects the deposits of Credit Union Members?
PIC - Provincial Insurance Corporations
What if the investment I buy declines in value? What organization protects me?
No Protection
Which activity is a requirement of the Gatekeeper Role?
Collect client information that is accurate and complete.
Identify the general principle underlying Canadian securities legislation.
Full, true and plain disclosure
Federal regulatory agency whose main responsibilities regarding insurance companies and segregated funds are to ensure that the companies issuing the funds are financially solvent.
OSFI - Office of the Superintendent of Financial Institutions
Role of dealers and all of their employees who are responsible for protecting the markets from potentially illegal client activities; Universal Market Integrity Rules set out specific rules.
Gatekeeper Role
A web-based system that permits mutual fund salespersons and investment advisors to file applications for registration electronically.
NRD - National Registration Database
A person who is licensed to sell securities but is not permitted to give investment advice.
Investment Representative
Making a practice, directly or indirectly, of taking the opposite side of the market to clients, or effecting a trade for the advisor’s own account before effecting a trade for a client.
Front-Running
Independent organization that investigates customer complaints against financial services providers.
OBSI - Ombudsman for Banking Services and Investments
The general principle underlying Canadian securities legislation. All pertinent facts by those offering securities for sale to the public must be disclosed.
Full, True, and Plain Disclosure
Protects eligible customers in the event of the insolvency of an SRO dealer member.
CIPF - Canadian Investor Protection Fund
Forum for the 13 securities regulators of Canada’s provinces and territories to co-ordinate and harmonize the regulation of the Canadian capital markets.
CSA - Canadian Securities Administrators
A method of dispute resolution in which an independent arbitrator is chosen to assist aggrieved parties recover damages.
Arbitration
Recognized by Securities Administrators, with powers to establish and enforce industry regulations to protect investors and to maintain fair, equitable, and ethical practices in the industry.
SRO - Self-Regulatory Organization
A list, administered by the CRTC, where Canadians can register their telephone numbers to prohibit telemarketers and clients of telemarketers from calling the number.
NDNCL - National Do Not Call List
A federal Crown Corporation providing deposit insurance against loss (up to $100,000 per depositor) when a member institution fails.
CDIC - Canadian Deposit Insurance Corporation
Administers the regulatory framework surrounding Québec’s financial sector including securities, distribution of financial products and services, and financial institutions.
AMF - Autorite des Marches Financiers
Term that is used to refer to the controls that inhibit information sharing between various businesses and business units.
Firewall
Type of investment fund that continually issues shares to investors and redeems these shares on demand.
Mutual Fund
Federally regulated foreign bank subsidiaries that have been authorized under the Bank Act to do banking business in Canada.
Schedule II Banks
The Role that an investment dealer is taking when the firm does not assume ownership of securities at some stage in the buying and selling transaction with investors.
Agent
Term used to refer to the difference between what banks pay as interest on deposits and what they charge as interest on loans.
Spread
Kuy, a very successful and knowledgeable investor, has inherited $200,000 and wants to create a diversified portfolio while minimizing costs. Determine the type of investment firm that is best suited for this client.
Self-Directed Broker
A large furniture store wants to sell its consumer instalment contracts to generate cash. Determine the financial intermediary the store should contact.
Sales Finance Company
Which department is responsible for the portfolio management activities in a securities firm?
Front Office
Identify the process by which the number of securities and the amount of cash that has to change hands among the various exchange members each day is substantially reduced.
Netting
Identify the investment service that features portfolios created using algorithms based on modern portfolio theory and online client questionnaires.
Robo-Advisors
Thuy’s firm develops more efficient online financial planning applications for investors and investment advisors. Identify the type of firm Thuy owns.
Fintech
ABC Securities offers a wide range of products and services to both retail and institutional clients, as well as underwriting bond and equity issues. Determine the category of firm ABC belongs to.
Integrated Firms
XYZ Investments, an investment dealer, regularly takes positions in DEF Inc, a TSX listed equity, with a goal of improving liquidity in DEF while smoothing out unwarranted price fluctuations. Identify the role XYZ likely plays in the stock market.
Market Maker
Identify the role of capital investment in the economy.
Creating Growth
Non-financial domestic corporations are sources of capital. Identify what role these corporations play in the capital markets.
Not significant providers of permanent funds.
Identify the typical role of foreign investors in Canadian Capital markets.
Direct investment in Canadian industries.
Identify the characteristics of capital.
Mobile, Scarce, and Sensitive to its Environment
Identify the transaction that takes place in the secondary market.
Resale of previously issued securities.
Identify a difference between auction and dealer markets.
Prices are publicly visible in the auction market but not in the dealer market.
Nicolae is considering selling his common shares of DEF Corp. Identify the price Nicolae would most likely receive if he were to enter an order to sell his shares.
Bid price
Select the exchange in Canada that deals exclusively with financial futures and options.
MX - Montreal Stock Exchange/The Bourse de Montreal
Choose the system that the Ontario Securities Commission requires firms to use to report unlisted trades in Ontario.
CUB - Canadian Unlisted Board
Identify the role that the Canadian Securities Exchange (CSE) plays in the Canadian marketplace.
Market for emerging companies.
Identify the security that has its value based on an underlying instrument.
Derrivative
Select the electronic fixed-income trading system that operates a retail and an institutional fixed-income marketplace.
CBID/CBID Institutional
Provides institutional investors with electronic access to federal bond bid and offer prices and yields from its six bank-owned dealers.
CanDeal
A joint venture of several CIRO member firms and operates as an electronic trading system for fixed income securities providing investors with real-time bid and offer prices and hourly trade data.
CanPx
Makes direct cash loans to consumers, who usually are unable to secure a loan from a bank. Consumer finance companies typically charge a higher interest rate than banks.
Consumer Finance Company
A type of registered pension plan in which the annual payout is based on a formula. The plan pays a specific dollar amount at retirement using a predetermined formula. Company contributes.
Defined Benefit Plan
A type of registered pension planwhere the amount contributed is known but the dollar amount of the pension to be received is unknown. Also known as a money purchase plan. Both company and employee contribute.
Defined Contribution Plan
Spreading investment risk by buying different types of securities in different companies in different kinds of businesses and/or locations.
Diversification
Confirming a transaction where no trade has been executed.
Bucketing
The responsibility of an investment advisor, mutual fund salesperson or financial planner to always put the client’s interests first. The fiduciary is in a position of trust and must act accordingly.
Fiduciary Responsibility
The policy pursued by the federal government to influence economic growth through the use of taxation and government spending to smooth out the fluctuations of the business cycle.
Fiscal Policy
The prospectus which supersedes the preliminary prospectus and is accepted for filing by applicable provincial securities commissions. The final prospectus shows all required information pertinent to the new issue and a copy must be given to each firsttime buyer of the new issue.
Financial Prospectus
An institution such as a bank, lifeinsurance company, credit union or mutual fund which receives cash, which it invests, from suppliers of capital
Financial Intermediary
Securities that generate a predictable stream of interest or dividend income, such as bonds, debentures and preferred shares.
Fixed-Income Securities
Making a practice, directly or indirectly, of taking the opposite side of the market to clients, or effecting a trade for the advisor’s own account prior to effecting a trade for a client.
Front-Running
A new issue of securities offered to the public for investment for the very first time. IPOs must adhere to strict government regulations as to how the investments are sold to the public.
IPO - Initial Public Offering
A legal entity that represents the collective financial interests of a large group. A mutual fund, insurance company, pension fund and corporate treasury are just a few examples
Institutional Client
Organizations, such as pension and mutual fund companies, that trade in large-share quantities or dollar amounts. They typically have a steady flow of money to invest.
Institutional Investor
Investment dealer that offersproducts and services that cover all
aspects of the industry, including full participation in both the institutional and the retail markets.
Integrated Firm
An individual licensed to transact in the full range of securities. IAs must be registered by the securities commission of the province in which he or she works. The term refers to employees of SRO member firms only. Also known as a Registrant or Registered Representative (RR).
Investment Advisor
A small retail or institutionalinvestment dealer that specializes in a specific market segment such as stock trading, bond trading, unlisted stocks, arbitrage, portfolio management, targeted industry research, underwriting junior mines, oils and industrials, mutual fund distributions, or tax-shelter sales.
Investment Boutique
A person or company that engages in the business of trading in securities in the capacity of an agent or principal and is a member of CIRO.
Investment Dealer
The cardinal rule in making investment recommendations. All relevant information about a client must be known in order to ensure that the registrant’s recommendations are suitable. KYC requires you to understand a client’s personal and financial circumstances, investment knowledge, investment needs and objectives, risk profile, and investment time horizon.
KYC - Know Your Client
The rule that requires you to know certain aspects of the products you recommend, including a product’s features, risks, costs, and potential performance in different types of market environments.
KYP - Know Your Product
A person who is licensed to sell securities but is not permitted to give investment advice.
Investment Representative
1. The ability of the market in a particular security to absorb a reasonable amount of buying or selling at reasonable price changes. 2. A corporation’s current assets relative to its current liabilities; its cash position.
Liquidity
A trader employed by a securities firm who is authorized and required, by the applicable self-regulatory organization (SRO), to maintain reasonable liquidity in securities markets by making firm bids or offers for one or more designated securities
Market Maker
A change in the affairs of a company that is expected to have a significant effect on the market value of its securities.
Material Change
Economic policy designed to improve the performance of the economy by regulating money supply and credit. The Bank of Canada achieves this through its influence over short-term interest rates.
Monetary Policy
An exchange that provides listing services and facilitates trading in securities listed on the NEO Exchange, TSX, and the TSX Venture Exchange.
NEO Exchange
Oldest and largest stock exchange in North America with more than 1,600 companies listed on the exchange
NYSE - New York Stock Exchange
A new and separate board of the TSX Venture Exchange that provides a trading forum for companies that have fallen below the Venture Exchange’s listing standards. Companies that have low levels of business activity or who do not carry on active business will trade on the NEX board, while companies that are actively carrying on business will remain with the main TSX Venture Exchange stock list.
NEX
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.
OSFI - Office of the Superintendent of Financial Institutions
Pool of assets managed with the goal of supplying its beneficiaries with income during their retirement years
Pension Fund
The initial document released by an underwriter of a new securities issue to prospective investors.
Preliminary Prospectus
The person for whom a broker executes an order, or a dealer buying or selling for its own account. The term may also refer to a person’s capital or to the face amount of a bond.
Principal
The market for new issues of securities. The proceeds of the sale of securities go directly to the company issuing the securities
Primary Market
An investment standard. In some provinces, the law requires that a fiduciary, such as a trustee, may invest funds only in a list of securities designated by the province or the federal government. In other provinces, the trustee may invest in a security if it is one that an ordinary prudent person would buy if he were investing for the benefit of other people for whom he felt morally bound to provide. Most provinces apply the two standards.
Prudent Portfolio Approach
A financial institution whose main role is to accept savings deposits and pay interest on those deposits. Usually set up by a government and is similar in function to a credit union. ATB Financial is an example.
Savings Bank
A client’s willingness to accept risk.
Risk Tollerance
Canadian-owned banks. The largest 6 banks in Canada out-distance the asset size of other Canadian-owned banks. Schedule I banks are regulated by the Bank Act
Schedule I Banks
Banks that are incorporated and operate in Canada as federally regulated foreign bank subsidiaries. Regulated by the Bank Act. Same operations as Schedule I Banks.
Schedule II Banks
A client’s ability to endure a potential financial loss.
Risk Capacity
The market where securities are traded through an exchange or over-thecounter subsequent to a primary offering. The proceeds from trades go to the selling dealers and investors, rather than to the companies that originally issued the shares in the primary market.
Secondary Market
An organization recognized by the Securities Administrators as having powers to establish and enforce industry regulations to protect investors and to maintain fair, equitable, and ethical practices in the industry and ensure conformity with securities legislation. The Canadian Investment Regulatory Organization (CIRO) rules govern the activities of investment dealer firms and mutual fund dealer firms across the country.
SRO - Self-Regulatory Organization
A marketplace where buyers and sellers of securities meet to trade with each other and where prices are established according to laws of supply and demand.
Stock Exchange
Ownership interest in a corporation’s that represents a claim on its earnings and assets.
Stock
The period spanning the present untilthe next major change in the client’s circumstances. Clients go through various events in their lives, each of which can represent a time horizon and a need to completely rebalance their portfolio.
Time Horizon
An exchange that provides trading in securities listed on TSX and TSXV.Order price and volume information is publicly available.
TSX Alpha Exchange
Canada’s public venture marketplace, the result of the merger of the Vancouver and Alberta Stock Exchanges in 1999.
TSX Venture Exchange
Gareth asks his Investment Advisor to purchase $50,000 in new corporate bonds that are being issued to raise funds to build a new processing facility. Select the term that would refer to this type of capital investment.
Indirect Investment
Identify a characteristic of dealer markets.
Primary market for bonds and debentures.
The current bid price for ABC Inc is $25.75 and the ask price is $25.87, with last trade at $25.77. Calculate the spread.
0.12
Identify a characteristic of a liquid market.
Narrow price spreads in bid/ask prices.
XYZ is a producer of technologically advanced experimental electronic devices that has recently experienced rapid growth. Projections are that growth will continue but the market is uncertain at present. Determine the exchange XYZ’s investment dealer could recommend for listing of XYZ’s initial public offering.
CSE - Canadian Securities Exchange
Identify the alternative trading system where an investment dealer can locate real time bid and offer quotations from a range of dealers for Government of Canada bonds and treasury bills.
CanPX
Select the type of organization the Canadian Investor Protection Fund provides protection to for eligible investors in the event of insolvency.
SRO Members
Identify CIRO's main responsibility
Regulating the distribution side of the mutual funds industry.
Choose the organization that is ultimately responsible for the regulation of the securities industry in Canada.
Each province and territory.
Identify the general principle underlying the requirement for information contained in a prospectus.
Full, true and plain disclosure of material facts.
Indicate the organization that all employees of investment dealer members of the Canadian Investment Regulatory Organization (CIRO) who deal with the investing public must register with.
Indicate the organization that all employees of investment dealer members of the Canadian Investment Regulatory Organization (CIRO) who deal with the investing public must register with.
Dealer or Auction Market: Bond and debenture markets
Dealer
Dealer or Auction Market: TSX, ME, TSX Venture
Auction
Dealer or Auction Market: Canadian Unlisted Board
Dealer
Dealer or Auction Market: Transaction between principals (market makers)
Dealer
Dealer or Auction Market: Major stock markets in Canada
Auction
Dealer or Auction Markets: Network of dealers trading with each other over telephones or computers
Dealer
Dealer or Auction Markets: Less regulation for companies traded on this market
Dealer
Dealer or Auction Markets: Higher dollar volume of trading
Dealer
Dealer or Auction Markets: No listing requirements for companies trading on this market
Dealer
Dealer or Auction Markets: Transactions are between brokers acting as agents for the buyers and sellers
Auction
Dealer or Auction Markets: Listing requirements to trade on this market
Auction
Acts as an intermediary by matching investors with users of capital.
Investment dealer
Sets and enforces rules that govern market activity and monitors the markets to ensure fairness and transparency
SRO
Oversees the market and the Canadian Investment Regulatory Organization
Provincial regulators
Identify the types of activities a Schedule II bank engages in.
The same types of business as Schedule I banks.
Identify an activity of a trust company.
Can act as trustees in charge of individual assets.
Can act as trustees in charge of individual assets.
Underwriting
Identify the activity of a sales finance company.
Purchase instalment sales contracts from retailers.
Firm that is an investment dealer serving organizations that trade large volumes of securities. Clients typically include mutual funds, pension funds, and insurance companies.
Institutional Firm
Execute trades for clients at reduced rates, but they do not provide investment advice.
Self-Directed Broker
A type of bank that is federally regulated and is a foreign bank branch of a foreign institution.
Schedule III Bank
Type of bank that is incorporated and operates in Canada as a federally regulated foreign bank subsidiary.
Schedule II Bank
Identify a characteristic of large Schedule I bank voting shares.
Single shareholder or group of shareholders may own up to 20%.
Identify the action of a dealer as principal in an underwriting.
Purchase the issue anticipating to resell at a profit.
Identify the term used to refer to the difference between what banks pay as interest on deposits and what they charge as interest on loans.
Spread
The sharing/exchanging of risk between insurance companies to facilitate better risk management.
Reinsurance
The federal government finances expenditures using....
T-Bills and Marketable Bonds
To access capital, Business may issue...
Preferred and Common Shares
Individuals may use capital for...
Mortgages
To access capital, Municipal governments may issue
Instalment Debentures
Describe a Principal Transaction
- A brokerage selling securities that it owns to a client;
- A brokerage purchasing securities for its own inventory;
- A dealer selling a security to a client for more than what it was purchased for.
A line of credit falls under which category of household debt?
Consumer Debt
What office of a brokerage firm would be responsible for trade settlement?
Back Office
An insurance company acts as trustees for the funds provided to them by policyholders. What investment approach should it follow when selecting investments?
It must exercise extreme caution so it can meet future obligations.
Which entity has the most authority?
The Provincial Administrator
A paper certificate or electronic record that represents ownership of an equity or debt obligation
Security
Under what type of pension plan does an employer and potentially an employee contribute a certain amount each year into that employee's plan>
Defined Contribution Plan
Credit Unions and Insurance Companies must adhere to which type of investment management approach when investing?
A prudent portfolio approach
Which funtion would the back office of an investment dealer be responsible for?
Trade Settlement
Property and causualty companies have a number of different business lines. Which one represents the largest in terms of aggregate premiums?
Automobile Insurance
How do the services that a Schedule II Bank can offer compare to the services offered by a Schedule I Bank?
A Schedule II Bank is permitted to offer all of the same types of services as a Schedule I Bank.
When the dealer maintains a two-sided market for a security whereby it holds itself as both a buyer and seller of that security.
Investment brokerage acting as a market maker
Crytpocurrency eliminates...
Couterfeiting and fraud
Key function of the middle office within a securities firm
Accounting
What percentage of one's pre-retirement income do experts believe people generally need through retirement?
70%
Another commonly used term for Bitcoin
Digital Gold
What percentage of a Schedule I Bank can be owned by one individudal or a group of individuals acting together>
No more than 20% of the voting shares
Pension plan that guarantees a set retirement benefit in the future
Defined Benefit Plan
What type of transaction does the dealer's profit or loss come in the form of a spread between the purchase and selling price?
One in which a dealer acts as a principal
When a private company issues stocks for the very first time, it is referred to as what?
IPO - Initial Public Offering
What type of funds accounts for approximately 95% of the aggregate funds invested?
Open-End Funds
What is the primary responsibility of a financial intermediary?
To help facilitate the transfer of capital from savers to users
With what type of transaction does the dealer's profit or loss come in the form of a commission?
One in which the dealer acts as an agent
What products are insurance companies allowed to offer?
Segregated Funds and Deferrred Annuities
What exchange would a debt instrument that is convertible into a listed equity most likely trade on?
TSX
Confirming a trade that did not exist.
Bucketing
At what hours do the OTC derivative markets operate?
24 Hours a Day
Which of the exchanges would a small company most likely be listed?
TSX Venture Exchange
The system of rules, policies, and procedures by which a company is controlled...
Corporate Governance
Three methods the Securities Acts use to protect investors
RED - Registration, Enforcement and Disclosure
Who is responsible for regulating federally registered pension plans?
OSFI
Who regulates the securities industry?
CIRO
To whom do the securities commissions delegate some of their powers?
SRO
What type of regulatory model does the Canadian Securities Industry use?
A Principles-Based Model
How to increase the level of CDIC protection available to a client?
Spreading deposits across multiple banks
What is an important feature of arbitration?
The decision of the arbitrator is binding
What are the four primary objectives of regulation in the securities industry?
Consumer Protection, Fairness, Economic Stability and Social Objectives
How many days does a phone number need to be listed on the DNCL before it qualifies as a number that cannot be called?
More than 31 days
Who sponsors the CIPF?
CIRO
What organization regulates mutual funds themselves?
The provincial administrator
How often must a registrant review his or her client's KYC info?
Every 36 months, even if the registrant has already had an interaction with the client since the previous review
Canada’s interactions with the rest of the world which are captured here in the current account and capital account.
Balance of Payments
The price at which the quantity demanded equals the quantity supplied.
Equilibrium Price
A social science that is concerned with an understanding of production, distribution, and consumption of goods and services.
Economics
An economic system where the decisions regarding investment, production, and distribution of goods and services are guided by the price signals created by the forces of supply and demand.
Market Economy
Total amount consumers are willing to buy at a particular price during a given period
Quantity Demanded - The higher the price, the lower the demand; and the lower the price, the higher
the demand
Total amount that producers are willing to supply at a particular price during a given period.
Quantity Supplied - The higher the price of a good, the greater the quantity supplied
Individual markets of goods and services. It looks at how businesses decide what to produce and who to produce it for, and how individuals and households decide what to buy.
Microeconomics
Employment levels, interest rates, inflation, recessions, government spending, and the overall health of the economy. Deals with economic interactions between countries.
Macroeconomics
Micro or Macro: How are the prices for goods and services established?
Microeconomics
Micro or Macro: Why did the economy stop growing last quarter?
Macroeconomics
Micro or Macro: Why did the price of bread go up?
Microeconomics
Micro or Macro: Why has the number of jobs fallen in the last year?
Macroeconomics
Micro or Macro: How do minimum wage laws affect the supply of labour and company profit margins?
Microeconomics
Micro or Macro: Will lower interest rates stimulate growth in the economy?
Macroeconomics
Micro or Macro: How would a tax on softwood lumber imports affect growth prospects in the forestry industry?
Microeconomics
Micro or Macro: How can a nation improve its standard of living?
Macroeconomics
Micro or Macro: Why do stock prices rise when the economy is growing?
Macroeconomics
Micro or Macro: If a government places a tax on the purchase of mutual funds, will consumers stop buying them?
Microeconomics
Micro or Macro: How is inflation controlled?
Macroeconomics
Decision Makers in the Economy
CBG:
- Consumers
- Businesses
- Governments
Any arrangement that allows buyers and sellers to conduct business with one another.
Market
State in which anyone who wants to buy a product can do so, and anyone who wants to sell a product can do so.
Market Equilibrium
Total market value of all the final goods and services produced in a country over a given period.
GDP - Gross Domesic Product
Methods to Measure GDP
Expenditure Approach
Income Approach
Production Approach (value-added)
Adds up everything that consumers, businesses, and governments spend money on during a certain period. X & M
Expenditure approach
Adds up all the income generated in an activity.
Income approach
Also known as the value-added approach, calculates an
industry or sector’s output and subtracts the value of all goods and services used to produce the outputs.
Production approach
GDP Formula
GDP = C + I + G + (X - M)
dollar value of all goods and services produced in a given year at prices that prevailed in that same year. Includes changes in output but also changes in the prices of goods and services.
Nominal GDP
Removes the changes in output that are attributable to inflation and allows us to see how much GDP has grown, based solely on productivity.
Real GDP
Formula Real GDP
Nominal GDP - Inflation (ie price increases)
Output per unit of input...
Productivity
Key factors that contribute to gains in productivity
• Technological advances
• Population growth
• Improvements in training, education, and skills
What are the phases of the business cycle?
EPCTR:
- Expansion
- Peak
- Contraction
- Trough
- Recovery
Peak and trough before the overall economy. Anticipate emerging trends in economic activity by indicating what businesses and consumers have actually begun to produce and spend.
Leading Indicators
Change at approximately the same time and in the same direction as the whole economy, thereby providing information about the current state of the economy.
Coincident Indicators
Change after the economy as a whole changes. Can confirm that a business cycle pattern is occurring.
Lagging Indicators
Name the type of economic indicator: housing starts
Leading Indicator
Name the type of economic indicator: Manufacturers' new orders
Leading Indicator
Name the type of economic indicator: Commodity prices
Leading Indicator
Name the type of economic indicator: Average hours worked per week
Leading Indicator
Name the type of economic indicator: Stock prices
Leading Indicator
Name the type of economic indicator: The money supply
Leading Indicator
Name the type of economic indicator: Personal Income
Coincident Indicator
Name the type of economic indicator: GDP
Coincident Indicator
Name the type of economic indicator: Industrial Production
Coincident Indicator
Name the type of economic indicator: Retail Sales
Coincident Indicator
Name the type of economic indicator: Unemployment
Lagging Indicator
Name the type of economic indicator: Inflation Rate
Lagging Indicator
Name the type of economic indicator: Labour Costs
Lagging Indicator
Name the type of economic indicator: Private Sector Plant and Equipment Spending
Lagging Indicator
Name the type of economic indicator: Business loans and Interest on such borrowing
Lagging Indicator
Decline in business activity.
Recession
Recessions are identified by what criteria?
Depth
Duration
Diffusion
Identify the components used to measure GDP using the expenditure approach.
Consumer spending, business spending and investment, government spending, and net exports.
What is the difference between the real GDP and nominal GDP?
Real GDP removes the impact of inflation from the measure of growth.
Which factor directly contributes to growth in GDP?
Which factor directly contributes to growth in GDP?
What indication shows us we are moving into the peak of the business cycle?
Demand begins to outstrip the economy’s ability to supply goods and services
What is a characteristic of a recession?
Inventory levels rise
What do lagging indicators tell us about the economy and the business cycle?
Lagging indicators may confirm that a change in the business cycle is occurring
What is a characteristic of the unemployment rate measure?
It has an inverse relationship with phases of the business cycle.
What does the participation rate measure?
The share of the working-age population that is in the labour force.
Share of working-age population that is in the labour force
Participate Rate
Share of the labour force that is unemployed and actively looking for work.
Unemployment Rate
Formula for Participate Rate
Labour Force / Working Age Population then multiplied by 100
Formula for Unemployment Rate
Not working but actively looking / Labour Force then multiplied by 100
How to calculate Labour Force?
Add number of people working and number of people not working but actively looking for work
Type of unemployment tied directly to fluctuations in the business cycle
Cyclical Unemployment
Type of unemployment that only occurs during part of the year.
Seasonal Unemployment
Consists of the normal labour turnover that occurs when
people enter and leave the workforce, and during the ongoing creation and destruction of jobs
Frictional Unemployment
Type of unemployment that reflects a mismatch between jobs and potential workers.
Structural Unemployment
The minimal level, below which unemployment does not
drop.
Natural Unemployment Rate
If the economy is indeed experiencing a period of inflation, what are some of the costs associated with rising prices?
Erosion of standard of living for those on a fixed income.
Based on the Philips curve, what is the impact on inflation if unemployment continues to be low?
Inflation will tend to be high.
Develops when continued consumer demand pushes
prices higher.
Demand-pull Inflation
Develops due to an increase in the costs of production.
Cost-push Inflation
What is the impact on the Canadian dollar and Canadian interest rates if the U.S. raises its interest rates?
Interest rates will increase and the dollar will fall in value.
If discouraged workers are not included, what impact does that have on the unemployment rate?
The unemployment rate goes down because it includes only those looking for a job.
Who is included in the working age population?
The working age population includes everyone 15 years of age and older, regardless of whether they are looking for work.
What is the unemployment rate based on?
The % of the labour force that is looking for a job. The labour force is made up of people who are either working or looking for work.
Does the unemployment rate ever reach zero?
No, because there will always be some workers who have quit, been fired, or laid off, and recent graduates are typically unemployed until they find a job.
the minimum level below which unemployment does not drop. There will always be frictional and structural factors that affect unemployment.
Natural unemployment rate
A graph showing the relationship between inflation and unemployment.
Phillips curve
Statistical data that, on average, change at approximately the same time and in the same direction as the economy as a whole.
Coincident indicators
Price index which measures the cost of living by measuring the prices of a given basket of goods. Often used as an indicator of inflation.
CPI - Consumer Price Index
The branch of economics that analyzes the market behaviour of individual consumers and firms, how prices are determined, and how prices determine the production, distribution, and use of goods and services.
Microeconomics
The share of the working-age population (15 and older) that is in the labour market, either working or looking for work.
Participation Rate
The price at which the quantity demanded equals the quantity supplied.
Equilibrium Price
A sustained fall in prices where the consumer price index (CPI) is negative.
Deflation
Unemployment that results from a company or industry that only operates during specific seasons of the year.
Seasonal Unemployment
The value of all goods and services produced in a country in a year.
GDP-Gross Domestic Product
A finished product; one that is purchased by the ultimate end user.
Final Good
The detailed statement of a country’s economic transactions with the rest of the world over a given period.
Balance of Payments
The branch of economics that focuses on the performance of the economy as a whole, looking at the broader picture and to the challenges facing society as a result of scarcity and choice.
Macroeconomics
Also called the full employment unemployment rate. At this level of unemployment, the economy is thought to be operating at close to its full potential or capacity.
Natural Unemployment Rate
Unemployment that results from normal labour turnover, from people entering and leaving the workforce, and from the ongoing creation and destruction of jobs.
Frictional Unemployment
The sum of the population aged 15 years and over who are either employed or unemployed.
Labour Force
Unemployed individuals that cannot find jobs and have not made specific efforts to find a job within the previous month.
Discouraged Workers
A decline in the rate at which prices rise – i.e., a decrease in the rate of inflation. Prices are still rising, but at a slower rate.
Disinflation
Unemployment that results when workers are unable to find work or fill available jobs because they lack the necessary skills, do not live where the jobs are available, or decide not to work at the wage rate offered by the market.
Structural Unemployment
Nigel has recently completed a certificate in financial accounting and has decided to leave his current employer. He will spend the next two months looking for a job that better suits his new skills. What type of unemployment would Nigel’s situation be classified as?
Frictional
If production capacity is growing, corporate profits are increasing, and job creation is steady, in which phase of the business cycle is the economy likely operating?
Expansion
What is the pattern of economic signals that indicate that the economy is at the peak of the business cycle.
Demand exceeds the capacity of the economy. There are pressures on prices, wages and interest rates. These pressures begin to dampen demand for investments, housing and consumer goods.
What type of indicator is money supply considered?
Leading
What is the likely impact on short-term interest rates if inflation is expected to rise over the next year?
Nominal interest rates will rise.
Identify a factor that will contribute to economic growth.
Technological advances.
Inflation has risen in a country over the past year due to companies increasing their prices as a result of an increase in raw materials. Identify the cause of the inflation the country has experienced.
Cost-Push Inflation
A country’s economists propose that current interest rates be reduced. Indicate the potential result of this action.
Increase the possibility of profitabile business investments
If Canada’s inflation rate is consistently lower than that in the U.S., what impact will this likely have on the value of the Canadian dollar relative to the US dollar?
Increase
Real GDP grew by 4.6% last year, while nominal GDP grew by 8.2%. Calculate inflation for the period.
3.6%
Type of indicator: Unemployment
Lagging
Identify a factor that can allow for further employment growth when an economy is at the natural unemployment rate.
Increase in the level of wages
Select the factor that has the least influence on interest rates.
S&P/TSX Composite Index
Identify a factor that would be analyzed in microeconomics.
A Company decides to reduce overall production in the Canadian economy in the following year.
Nigel has recently completed a certificate in financial accounting and has decided to leave his current employer. He will spend the next two months looking for a job that better suits his new skills. What type of unemployment would Nigel’s situation be classified as?
Frictional
Difference between Deflation and Disinflation
Disinflation is a decrease in the rate of inflation but inflation is still present. Deflation means that inflation is actually negative, meaning prices are falling.
The sacrifice ratio suggests that there is a cost associated with what?
Reducing the inflation rate
Name the approaches that can be used when calculating GDP
Expenditure Approach
Income Approach
Production Approach
How will a rise in US interest rates impact canadiants holding US investments?
This will increse returns on US investments. Investors will be encouraged to move their investments to USD denominated securities, which will increase the supply of canadian dollars, thereby lowering their value.
Contractions and Peaks are phases of what?
Business Cycle
A US investor purchased a bond from a canadian company. Each month the investor will receive $5000 in interest from the canadian company. Where would the initial investment be captured?
The capital and financial account
What best describes disinflation?
A reduction in inflation from year to year
A US company submitted $100,000 to a canadian company. Based only on the information provided, where can you say this would definitely be captured?
The Balance of payments.
Someone who is out of work and is available and willing to work, but as become frustrated to the point he or she is no longer looking for work.
Discouraged worker
What three factors does Statistics Canada use to judge a recession?
Depth, Duration and Diffusion
What are the two components of the Balance of Payments
Current Account
Capital and Financial Account
If the equilibrium price for a product is $500 and the market price is currently $700, what would most likely be true of the supply and demand relatioinship in respect to that product?
Supply would outweigh demand
What could the Government of Canada do to encourage foreign investment in Canada, increasing the relative value of the Canadian Dollar?
Increase Interest Rates
What would be a result of a negative interest rate?
A borrower would be paid to borrow money
Suggests that the direct government intervention is the ony method of ensuring economic growth and stability in the economy
Keynisian Theory
If a government is at high risk for default, what impact does that have on that country's local economy?
Interest rates rise for everyone
Under what circumstance is supply most likely to exceed demand>
If the market price is above the market equiilbrium price.
What would be the impact of a country running a current account deficit?
- It could sell assets to finance spending
- It would be reflected in the capital and financial account-
- it could go into debt
When the inflation rate of canada is expected to rise, how may a lender react?
They can charge higher interest rates to offset the decline in the canadian dollar's purchasing power.
What would likely happen if a country had a trade account deficit?
It would have to run a capital and financial account surplus
The difference between an economy's actual output and its potential output when operating at full capacity
Output Gap
A bank just installed ATM's in every branch. This allowed the babk to reduce the number of bank tellers by 10%. What type of unemployment does this represent>
Structural Unemployment
A company's costs have increased, resulting in the company increasing prices
Cost-Push Inflation
The demand for a company's product has increased, allowing them to increase their prices.
Demand-Pull Inflation
What is a consequence of increased savings?
Lower demand for borrowing, which could lead to lower interest rates.
A countrys real GDP has grown every year for the last 6 years at a rate of 4%. Real GDP Growth has now begun to decrease. Given this limited information, what phase of the business cycle is the country likely in?
Contraction
What would most likely occur if a country is on the verge of civil war?
The value of its currency would drop
Formula for Labour Force
Working age population - number of discouraged workers
In which way could alow intrest rate environment affect the overall economy?
Provide a positive environment for economic growth
All else being equal, th price of a particular good moving above its equilibrium price would have what effect?
Excess Supply
What would likely happen if a country had a trade account deficit?
It would have to run a capital and financial account surplus
Which of the following actions could the Government of Canada take to encourage foreign investment in Canada, thereby increasing the relative value of the Canadian Dollar?
Increase interest rates
Cost Associated with reducing the Inflation rate
Sacrifice ratio
When the inflation rate of Canada is expected to increase, how may a lender react?
The can charge higher interest rates to offset the decline in the Canadian dollar's purchasing power
A US investor purchased a bond from a Canadian company. Each month the investor will receive $5000 in interest from the Canadian company. Where would the initial investment be captured?
The capital and financial account
A social science that focuses on an understanding of production, distribution, and the consumption of goods and services.
Economics
High inflation and a slowing of economic growth
Stagflation
MASCMH
Leading Indicators where:
- Money supply
- Average hours worked/week
- Stock prices
- Commodity prices
- Manufacturers' new orders
- Housing starts
A US investor purchased a bond from a Canadian Company. Each month the investor will receive $5000 interest from the Canadian company. Where would the interest payment be captured?
The current account
Effects of high interest rates
- Reduce business investment
- Encourage saving
- Reduce consumption
All else being equal, higher inflation would have what impact?
It would lower the real rate of return
The government has announced it intends to lower personal income tax rates by 2%. Identify the economic situation the government is trying to influence.
The economy is in recession
Identify the correct government action to stimulate the economy if growth is slowing.
Run a deficit
The government ended the program that provided tax subsidies to solar energy companies. Identify the economic problem the government is addressing.
Reduce rapid growth and potential inflation by increasing taxes to businesses
The government determines that it needs to slow down the economy using fiscal policy tools in order to control inflation. Identify the impact this policy will have on the various components of gross domestic product (GDP).
Government spending (G) and business spending (I) will decrease and taxation will increase, causing consumption (C) to fall.
Identify the impact on the economy if the current government runs a deficit for several years in a row.
The national debt will increase and businesses may be crowded out of the capital markets
When the government runs a deficit, it must borrow from the capital markets to finance the national debt. This leaves less capital for businesses to borrow
Crowded-Out
Goal is to preserve the value of money by promoting sustained economic growth with price stability
Monetary Policy
How do you improve the performance of the economy by regulating credit
Using Monetary Policy
Who's responsibility is it to implement monetary policy?
Bank of Canada
How does the Bank of Canada carry out monetary policy?
By influencing short-term interest rates - targets overnight rate, open market operations and drawdowns and redeposits
Sets the trend for short-term interest rates in the economy
Target Overnight Rate
Key interest rate set in the overnight market
Overnight Rate
Where major Canadian financial institutions lend each other money on an overnight basis
Overnight Market
Minimum rate at which the Bank of Canada lends money to the chartered banks and other members of Payments Canada in its role as lender of last resort
Bank Rate
Upper limit of the overnight lending rate’s operating band
Bank Rate
Two main open market operations that the Bank uses to conduct monetary policy
Overnight Repos and Overnight Reverse Repos
Used when interest rates are climbing and the Bank of Canada wants to lower interest rates if it feels it needs to stimulate the economy
Overnight Repos
used if the Bank of Canada is concerned interest rates are falling too low which could cause inflationso they want to raise rates.
Overnight Reverse Repos
The Bank of Canada wants to decrease the money available in the financial system, to raise interest rates, it transfers money from its account at a chartered bank. The chartered bank no longer has that money available to loan out, thus increasing interest rates.
Drawdowns
The Bank of Canada wants to increase the money available in the financial system, to lower interest rates, it puts money into the government account at a chartered bank. The money available increases and the chartered bank will try to loan out the money, stimulating the economy.
Redeposits
Over the past three months, Canada has reported inflation rates of 2.7%, 2.9%, and 3.3% (in months 1, 2 and 3 respectively). Identify the policy action the Bank of Canada will likely take.
Raise short term interest rates (can use an overnight reverse repo)
Identify the interest rate the Bank of Canada uses to conduct monetary policy.
The Overnight Rate
Identify the action the Bank of Canada will take if an increase in demand for overnight money has led to upward pressure on overnight financing rates.
Use an overnight repo to relieve upward pressure on overnight financing rates and lend at the upper limit of the operating band
Identify the monetary policy tool the Bank of Canada will take if it wants to reduce the supply of cash balances in the banking system.
Drawdown
Acts to stabilize the Canadian economy by administering monetary policy, independently and without day-to-day intervention from the government.
Bank of Canada
Policy designed to improve the economy’s performance through the regulation interest rates. The elected government sets monetary policy, and the Bank of Canada administers it.
Monetary Policy
The Bank thinks inflation is too high. What would it do?
The Bank might raise interest rates which would make borrowing more expensive. As a result, consumers and businesses would borrow less, reducing demand in the economy and curbing inflation.
Bank of Canada can decrease interest rates by making a
Redeposit
Bank of Canada can increase interest rates by making a
Drawdown
The goal of _____________________ is to preserve the value of money by keeping inflation low, stable and predictable. The focus is on keeping inflation between 1% and 3%.
Monetary Policy
The policy pursued by the federal government to influence economic growth through the use of taxation and government spending.
Fiscal Policy
The minimum rate at which the Bank of Canada makes short-term advances to the chartered banks, other members of Payments Canada and investment dealers who trade in the money market.
Bank Rate
The accumulation of total government borrowing over time; the sum of past deficits minus the sum of past surpluses.
National Debt
A Payments Canada electronic system for the transfer of large dollar payments between participating financial institutions.
Lynx system
An open-market operation used by the Bank of Canada to relieve undesired upward pressure on overnight financing rates.
Overnight Repos
This association operates a highly automated national clearing system for interbank payments. Members include chartered banks, trust and loan companies and some credit unions and caisses.
Payments Canada
An open-market operation by the Bank of Canada to offset undesired downward pressure on overnight financing costs.
Overnight Reverse Repo
The interest rate set in the overnight market.
Overnight Rate
Occurs when government revenue for the year exceeds expenditures.
Budget Surplus
Occurs when total spending by the government for the year is higher than revenue collected.
Budget Deficit
The policy designed to improve the performance of the economy by regulating credit.
Monetary Policy
An investment dealer appointed by a company or government to advise it in financial matters and to manage the underwriting of its securities.
Fiscal Agent
Identify a function that the Bank of Canada performs as a fiscal agent to the federal government.
Managing the government’s foreign currency reserves.
What current monetary policy target does the Bank of Canada use to promote sustained economic growth with price stability?
Maintain inflation within a 1% to 3% target range.
How is the Bank Rate set?
Upper limit of the Bank of Canada's operating band
When will the Bank of Canada use overnight reverse repos?
When there is an undesired downward pressure on overnight rates
The Bank of Canada transferred deposits from the chartered banks. Identify the monetary policy that they utilized.
Drawdown
The federal government needs to stimulate the economy. Identify the fiscal policies you would recommend they use.
Spend more tax less
What is a consequence of large national debt
Fiscal policy options are restricted due to the high level of debt.
Identify the two most important ways in which the Bank of Canada influences interest rates.
Cash Management and open market operations
What policy action should the Bank of Canada take if it is concerned that interest rates are too high?
Implement a redeposit to increase the money available in the economy.
If the lower band of the overnight rate of interest is 1.25%, at what rate will the Bank of Canada, as lender of last resort, lend money to the members of Payments Canada?
1.75%
How do participating financial institutions electronically conduct large transactions with each other?
Lynx System
Identify a function that the Bank of Canada performs as a fiscal agent to the federal government.
Managing the government’s foreign currency reserves.
Overnight money is trading at 3.5%, which is above the Bank Rate of 3.25%. The Bank of Canada offers to lend overnight money to chartered banks. The chartered banks give the Bank of Canada treasury bills as collateral for the loan, getting them back the next day when the loan is repaid. What type of monetary policy tool is the government utilizing?
Overnight repo
The bank of canada rate is 2.5%. The interest rates are volatile. At which point will the begin to offer overnight reverse repos?
2.0%
What is the main role of the Bank of Canada?
To promote the economic and financial welfare of Canada
What type of government policy has the primary goal of acheiving long-term sustained economic growth?
Fiscal Policy
What fiscal policy is likely to be effective when the economy is weak?
Spending more
When the government borrows significantly in capital markets, which leaves less capital for businesses to grow
Crowding Out
If the US is in an economic recession, how will that impact Canada? Exports from Canada to the US will ______________, thereby causing an __________________ in Canada's GDP.
Decrease; Decrease.
Strategies to lower money supply and put upward pressure on interest rates
Overnight reverse repo
Drawdown
Strategies to Increase money supply and put downward pressure on interest rates
Overnight Repo
Redeposit
If the US economy is experiencing inflation, how will that impact Canada? The price of items Canada imports from the US will __________________, potencially causing ______________ in Canada
Increase; Inflation
What impact would an increase in interest rates have on consumer spending? It would ____________________ consumer spending.
Decrease.
How would one calculate national debt?
It is the sum of past deficits less the sum of past surpluses
How often does the Bank announce whether it will change the target bank rate?
On 8 pre-set dates during the year
The bank of Canada initiated a drawdown to try to influence the direction of interest rates. All else being equal, what impact would this have? It would __________________ money supply which would ______________________ on interest rates
Decrease; Put an Upward Pressure
When economic growth slows sharply but does not turn negative, while inflation falls or remains steady
Soft Landing
Using borrowed funds to seek magnified percentage returns on an investment
Financial Leverage
A certificate evidencing a debt on which the issuer promises to pay the holder a specified amount of interest based on the coupon rate, for a specified length of time, and to repay the loan on its maturity.
Bond
A certificate of indebtedness of a government or company backed only by the general credit of the issuer and unsecured by mortgage or lien on any specific asset.
Debenture
The principal amount the bond issuer contracts to pay at maturity to the bondholder.
Par Value
The interest or rate paid by the bond issuer relative to the bond’s par or face value over the term of the bond.
Coupon rate
The date at which a bond matures, when the principal amount of the loan is paid back to the investor holding the bond as well as the final interest payment.
Maturity date
The time that remains before a bond matures.
Term to maturity
The present discounted value of all the future payments that the bond issuer is obligated to pay the investor.
Bond price
The annual return on a bond that is held to maturity
Yield to maturity
The right, but not the obligation, to pay off the bond before maturity, either to take advantage of lower interest rates or simply to reduce their debt when they have the excess cash to do so
Callable Bond Feature
The period before the first possible call date.
Call Protection Period
Terms granting the holder the option to extend the maturity date by a specified number of years. The investor can exchange the debt for an identical amount of longer-term debt (typically 10 years) at the same rate or a slightly higher rate of interest.
Extendible bonds
Grants the holder the option under specified conditions to
force the issuer to redeem the debt security. Issued with a long maturity term but with the option to redeem early.
Retractable Bonds
The specific time period in which to notify the company if they want to exercise the maturity option.
Election Period
A bond or debenture which may be exchanged by the owner, usually for the common stock of the same company, in accordance with the terms stated. Usually callable at a small premium.
Convertible Bond
The dollar value at which a convertible bond or security can be converted into common stock.
Conversion Price
The right to exchange a bond for common shares on specifically determined terms.
Conversion Privilege
Excuses the issuing company from having to pay any accrued interest on the convertible bond that has built up since the last designated interest payment date. Also, the holder is only entitled to those dividends declared and paid after the conversion takes place.
“No adjustment for interest or dividends” Clause
If the common shares of the company are split the conversion privilege will be adjusted accordingly.
"Protection against dilution" Clause
When a company’s stock rises in value above the conversion price a company may force the convertible securityholder to exchange the security for stock by calling back the security
Forced Conversion
Sums of money that are set aside out of earnings each year to provide for the repayment of all or part of a debt issue by maturity. BINDING!
Sinking Fund
Fund set up to retire a specified amount of the outstanding bonds or debentures through purchases in the market. The purchases must be available at or below a stipulated price.
Purchase Fund
Covenant clauses that secure the bond.
Protective Provisions
In the case of a mortgage or an asset-backed or secured debt, this clause includes details of the assets that support the debt.
Security
This clause provides that the borrower will not pledge any assets if the pledge results in less security for the debt holder.
Negative Pledge
This clause protects the debt holder against the firm selling and leasing back assets that provide security for the debt.
Limitation on sale and leaseback transactions
This clause protects the debt holder in the event that all of the firm’s assets are sold or that the company is merged with another company, forcing either the retiring of the debt or its assumption by the newly-merged company.
Sale of Assets or Merger
This provision establishes the rules for the payment of dividends by the firm and ensures equity will not be drained by excessive dividend payments.
Dividend Test
This provision limits the amount of additional debt that a firm may issue by establishing a maximum debt-to-asset ratio.
Debt Test
This clause states which financial tests and other circumstances allow the firm to issue additional debt.
Additional Bond Provisions
This clause outlines the provisions of the sinking or purchase fund and the specific dates and price at which the firm can call the debt.
Sinking or Purchase Fund and Call Provisions
Non-callable bonds that have a specific maturity date and a specified coupon or interst rate. Are transferable.
Government of Canada Bonds
What are the highest quality rating bonds?
Federal Government Bonds
Short-term government obligations offered in denominations from as low as $1,000. Do not pay interest, but are sold at a discount and mature at par. The difference between the purchase price and par at maturity represents the lender’s (purchaser’s) income in lieu of interest.
Treasury-Bills (T-Bills)
The coupon payments and principal repayment are adjusted for inflation to provide a fixed real coupon rate.
Real Return Bonds
Cumulative level of inflation since the date a bond was issued
Inflation Compensation
What types of securities are issued by the Government of Canada?
Government Bonds
T-Bills
Real Return Bonds
What types of securities are issued by Provincial and Municipal Governments?
Guaranteed Bonds
Provincial Securities
Municipal Securities (Serial Bonds/Instalment Debenture)
What are Provincial and Government Bonds?
Debentures - promises to pay. Their value depends on their ability to pay interest and repay principal. No assets are pledged as securities.
How do you determine bond quality?
Credit Quality and Market Conditions
The degree of certainty that both principal and interest will be paid when due
Credit Quality
Bonds issued by a crown corporation but guaranteed by the applicable government as to interest and principal payments
Guaranteed Bonds
What are the charateristics of Savings Bonds?
Can only be purchased by residents of the province;
Can only be purchased at certain times of the year;
May have redemptions rules, which can vary depending on the province.
A bond or debenture issue in which a predetermined amount of principal matures each year.
Instalment Debenture / Serial Bond
What does a municipality's credit rating depend on?
Its Taxation Resources
Name the types of Corporate Bonds
Mortgage Bonds
Floating-Rate Securities
Collateral Trust Bond
Equipment Trust Certificates
Subordinated Debentures
Corporate Notes
High-Yield Bonds
A bond issue secured by a mortgage on the issuer’s property.
Mortgage Bond
Constitute a first charge on the company’s assets, earnings, and undertakings before unsecured current liabilities are paid
First Mortgage Bonds
What is considered the best sercurity a company can issue?
First Mortgage Bond
All assets can be used to secure the loan, even those acquired after the bonds were issued
After-Acquired Clause
Type of corporate issue that automatically adjusts to changing interest rates. These securities can be issued with longer terms than more conventional issues
Floating-Rate Securities / Variable-Rate Securities
Issued in the Currency and Country of the Issuer
Domestic Bonds
Issued Outside of the Issuer's Country and denominated in the country in which they are issued.
Foreign Bonds
What bonds give issuers access to sources of capital in other countries?
Foreign Bonds
Canadian Government issues a new bond in US Dollars in the Euromarket
Eurobond
Canadian company issues a US dollar bond in the US
Yankee Bond (Foreign Bond)
British company issues a yen-denominated bond in Japan
Samurai Bond (Foreign Bond)
Foreign company issues canadian dollar denominated bond in Canada
Maple Bond (Foreign Bond)
Bonds that offer the investor a choice of interest payments in either of two currencies; other bonds pay interest in one currency and the principal in another.
Foreign Pay Bonds
Offer investors increased opportunity for portfolio diversification while providing the issuer with cost-effective access to capital in other countries
Foreign Pay Bonds
International bonds issued in a currency other than the currency of the country where the bond is issued.
Eurobonds
Secured by a pledge of securities, or collateral
Collateral Trust Bonds
Pledge equipment as security instead of real property, issued in serial form
Equipment Trust Certificates
Junior to other securities issued by a company or other debts assumed by a company. Status is described in the prospectus.
Subordinated Debentures
Short-term unsecured promise made by a corporation to pay
interest and repay the funds borrowed at a specific date, or specific dates
Corporate Note
Lower credit-quality bonds that have a higher risk of default because they are deemed to have greater uncertainty over the issuer’s repayment of their financial obligations. These bonds typically pay higher coupons and have higher yields to compensate investors for the added risk
High-Yield Bond / Speculative Bond
Aside from bonds, what are some other types of Fixed-Income securities?
Bankers Acceptance
Commercial Paper
Term Deposits
Guaranteed Investment Certificates (GIC's)
commercial draft (i.e., a written instruction to make payment) drawn by a borrower for payment on a specified date. Guaranteed at maturity by the borrower’s bank. As with T-bills, they are sold at a discount and mature at their face value, with the difference representing the return to the investor.
Bankers'Acceptance
An unsecured promissory note issued by a corporation or an asset-backed security backed by a pool of underlying financial assets. Issue terms range from less than three months to one year. Sold at a discount and matures at face value.
Commercial Paper
Offer a guaranteed rate for a short-term deposit (usually up to one year). A penalty normally applies for withdrawing funds before a certain period (e.g., within the first 30 days after purchase).
Term Deposits
Offer fixed rates of interest for a specific term. Both principal and interest payments are guaranteed.
Guaranteed Investment Certificates (GIC)
Cannot be cashed before maturity, except in the event of the depositor’s death or extreme financial hardship.
Non-Redeemable GIC
What are the different types of GIC's?
Escalating-Rate GIC
Laddered GIC
Instalment GIC
Index-Linked GIC
Interest-Rate Linked GIC
The interest rate for these GICs increases over the GIC’s term
Escalating Rate 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 of terms reduces interest rate risk.
Laddered GIC
An initial lump-sum contribution is made for these GICs, with further minimum contributions made weekly, bi-weekly, or monthly.
Instalment GIC
These GICs provide the investor with a return that is linked to the direction of a market index, with the hope that a higher market return will generate a higher GIC return than would typically be expected from a standard GIC. The GIC guarantees a return of the initial investment at expiry while providing some exposure to equity markets. They may be indexed to domestic or global indexes or a combination of benchmarks.
Index-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.
Interest-Rate Linked GIC
Attractive for investors who have a limited amount of money to invest or who find investing in individual bonds too complex
Fixed-Income Mutual Funds and ETF's
How do you read a bond quote?
I-C-M-B-A-Y
Issuer
Coupon
Maturity Date
Bid (sold for)
Ask (bought for)
Yield to Maturity
Which type of government security is issued at a discount, trades in the market and matures at par?
T-Bill
Your client has a five-year investment horizon and expects inflation to rise each year. Which type of government-issued security would you recommend?
Real Return Bond
Which type of bond is issued by a Crown corporation of the Province of Alberta?
Guaranteed Bond
Which corporate bond is secured by physical property?
Mortgage Bond
Your client is interested in purchasing a five-year corporate bond that pays interest, but he is concerned about rising interest rates. Which type of fixed-income instrument would you recommend?
Floating Rate Security
A Canadian company, issues a euro-denominated bond in the United States. Which type of bond did Encana issue?
Eurobond
Japanese Yen-denominated bond issued by a Canadian company in Japan.
Foreign Bond
A bond secured by stocks or bonds of companies controlled by the issuing company.
Collateral Trust Bond
Japanese Yen-denominated bond issued by a Canadian company in Germany and Norway
Eurobond
A type of debt security that was historically used to finance “rolling stock” or railway cars.
Equipment Trust Certificate
A bond originally issued in bearer form where the interest coupons have been detached.
Strip Bond
The senior securities of the company, as they constitute a first charge on the company’s assets and earnings before unsecured current liabilities are paid.
First Mortgage Bond
A bond that may be exchanged by the owner for the common shares of the same company.
Convertible Bond
Canadian dollar-denominated bond issued by a U.S. company in Canada.
Foreign Bond
US dollar-denominated bond issued by a Canadian company in Belgium.
Eurobond
A bond issued in Canada by a Canadian issuer but pays interest and principal in a foreign currency.
Foreign Pay Bond
You are interested in the Provincial Bond Manitoba 10%, due May 15, 27. When is interest paid on this bond?
May 15 and Nov 15 each year
You purchased a 10-year Province of Ontario 4.5% bond. That purchase was made six years ago. How would this bond now be categorized?
Short Term Bond
For the 10% May 15, 27 121.44 Manitoba bond, calculate the price you are willing to pay for a face value of $10,000 (ignoring commissions and accrued interest).
$12,144
Calculate the principal amount you will receive at maturity if you purchase the Manitoba bond today at $121.44 and hold it until maturity.
$10,000
Let’s assume the Manitoba bond is currently rated AA by the S&P Bond Rating Service. The bond is subsequently downgraded to BBB status. What impact is this likely to have on the bond?
The price on the bond will fall
What effect does the downgrading of a bond generally have?
A negative effect on its price
A bond secured by stocks or bonds of companies controlled by the issuing company, or other securities, which are deposited with a trustee.
Collateral Trust Bond
The value of a bond or debenture that appears on the face of the certificate, ordinarily the amount the issuer will pay at maturity.
Face Value
A bond or debenture issue in which a predetermined amount of principal matures each year.
Instalment Debenture
A bond where the coupon payments and principal repayment are adjusted for inflation to provide a fixed real coupon rate.
Real Return Bond
A bond that may be redeemed upon due notice by the bond issuer.
Callable Bond
Usually high quality federal or provincial government bonds where some or all of the interest coupons have been detached and are sold separately.
Strip Bond
The amount by which a preferred stock or bond sells below its par value.
Discount
The rate of interest that appears on the certificate of a bond.
Coupon Rate
The rate of return investors would receive if they purchased a bond today and held it to maturity.
Yield to Maturity
Short-term government debt, issued at a discount to mature at par, in denominations ranging from $1,000 to $1,000,000.
T-Bill
A bond which may be exchanged by the owner for the common stock of the same company.
Convertible Bond
A certificate of indebtedness of a government or company backed only by the general credit of the issuer and unsecured by mortgage or lien on any specific asset.
Debenture
A domestic issuer debt security, issued in another country, denominated in that foreign country’s currency.
Foreign Bond
A debt instrument secured by a physical asset for which the issuer promises to pay the holder a specified amount of interest based on the coupon rate, for a specified length of time, and to repay the loan on its maturity.
Bond
A fund set up to retire most or all of a debt issue over a period of time.
Sinking Fund
The amount by which a preferred stock or debt security may sell above its par value.
Premium
Bonds that are issued in a currency other than the currency of the country where the bond is issued.
Eurobond
A domestic issuer debt security issued domestically that pays interest and principal in a foreign currency.
Foreign Pay Bond
Why are Government of Canada Real Return bonds attractive to investors?
The interest payment and principal repayment are adjusted for inflation.
Hardeep wishes to invest in a GIC that will allow him to continue to contribute money each month towards this investment. What type of GIC would you recommend to him?
Instalment GIC
Will a sinking fund or a purchase fund result in a greater proportion of a bond being retired early?
A sinking fund because retirements are mandatory.
A bond quoted as trading at 98, but with a $1,000 par value, would mean that:
The bond is trading at a discount
During what time period can Ngoc, who owns an extendible bond, decide to extend the maturity date of the bond?
The Election Period
The 5.25% ABC convertible bond is convertible into 50 shares of common stock for each $1,000 of face value. Identify the correct statement regarding the relationship between the convertible bond and the common stock.
If the common stock is currently trading at $22 a share, the ABC convertible will rise to a value of at least $1,100.
Identify the correct statement regarding a bond with a Moody’s rating of “A”?
Medium high quality
What type of company would issue a collateral trust bond?
Holding Companies usually do not own many fixed assets. They own securities in subsidiaries that can be pledged to secure bonds.
Why might someone invest in a strip bond?
If they do not require cash until after the bond matures.
ABC Inc. has just received a higher credit rating from Moody’s Canada Inc. What impact will this have on its ability to raise funds?
ABC will be able to pay a lower coupon rate on its new bonds as it is seen as a more creditworthy company
8.75% - yield is now 6%
Interest rates have gone down since the bond was first issued.
In November of the current year, Silpa has $10,000 to invest. She needs the full amount in one year. Select a suitable investment for her.
5-year Cashable GIC.
Natalie is concerned about the impact of inflation on her investments. She wishes to purchase an investment that shields her from the negative impact of rising prices. What security would you recommend to her?
Real return bond.
Interest rates have been declining dramatically over the last two years. Identify the investment that would be most affected by this decline.
Floating Rate Bonds
"B" buys a bond from "E". What period of time is used to calculate the amount in accrued interest owed?
From the day after the last interest payment up to and including the settlement date of the bond
What is another name for a "serial bond"?
Instalment Debenture
What protective provision allows an issuer to repay all or a portion of its bonds by maturity?
A Sinking Fund Provision
A US issuer issues a bond in India denominated in Canadian Dollars...
Eurobond
How is the difference between the amount paid for a strip bond and its maturity value taxed?
The difference is taxed as interest income
Investment is divided into several terms such that a portion of the investment matures each year
Laddered GIC's
Initial lump sum is invested with further minimum contributions made on a regular basis
Instalment GIC's
An unsecured debt security whereby part of the issue will mature each year
Instalment Debenture
If the government were to implement an SRA what impact would this likely have on bond prices?
Bond prices would decrease
Limits the amount of debt the issuer may take on by using a maximum debt to asset ratio
Debt test
Bonds are taxed as...
Capital Gain Income
Strip bonds are taxed as
Interest income
When someone need an Exact amount in ie 10 years from now, invest in what?
Strip Bond / Zero Coupon Bond
Highest Quality Grades of Bonds
Aaa
Aa
Medium Grade Bonds
A
Baa
Speculative Grade Bonds
Ba
B
Caa
Ca
Default Grade Bonds
C
Aaa, Aa, A & Baa Grade Bonds are
Investment Grade Bonds
Ba, B, Caa, Ca & C Grade bonds are
Non-investment grade bonds
Best bonds offer high or low coupon rates?
Low
Ex: Convertible
What bond feature is considered a negative feature?
Callable Bond, which usually offers a higher coupon rate
Callable Bonds offer higher or lower coupon rates?
Higher (negative feature)
What bond would offer a higher coupon rate - a bond with no special features or a bond with a callable feature?
Callable Feature
What is the name for a short-term unsecured promissory note issued by a corporation that has also been guaranteed by the borrower's bank?
Banker's Acceptance Paper
What is the name of the provision that protects existing debenture holders from the issuer issuing a mortgage bond unless the existing debenture holders are offered the same security?
Negative Pledge Provision
What is the name given to a debt instrument that is secured by stocks or bonds of companies that are controlled by the debt issuer?
Collateral Trust Bonds
What is the name for the paper certificate or electronic record that represents evidence of ownership of an equity or debt obligation?
Security
What bonds always trade at a discount even if interest rates are falling?
Strip Bonds - ALWAYS trade at a discount
What phrase or term is used to describe a company that uses borrowed funds to increase shareholder return on equity?
Financial Leverage
A bond issuer expects the interest rates to decline in the coming months and years. If their prediction is correct, the issuer would like to take advantage of this opportunity. What type of bond feature would allow the issuer to take advantage of a decline in interest rates?
Callable feature
T-bills are sold at a _______________ and mature at ____________. The Difference is taxed as ________________________.
Discount;
Par;
Interest
The current worth of a sum of money that will be received sometime in the future
Present Value
The current worth of a sum of money that will be received sometime in the future
Present Value
The rate at which you would discount a future value to determine the present value
Discount Rate
When calculating the PV of a Bond, N = ( use a 4 year semi annual 9% bond with a 10% Discount Rate as an example)
Number of Compound Periods (ex: if it is 4 years and pays semi-annually, 4 x 2 = 8)
When calculating the PV of a Bond, I/YR = (use a 4 year semi annual 9% bond with a 10% Discount Rate)
Discount Rate (if the discount rate is 10%, and it is semi-annual, then 10/2 is I/YR = 5% per period).
When Calculating the PV of a Bond, PMT = (use a 4 year semi annual 9% bond with a 10% Discount Rate as an example)
Coupon Rate (if it pays semi annually, 9% / 2 = 4.5).
What is the formula to calculate the Current Yield on a bond?
CY = Annual Cashflow / Current Market Price x 100
What is the formula to calculate the Yield on a T-Bill?
Yield = 100 - Price / price; x 365 / term; x 100
What item don't you know when calculating YTM? In this case, in what order do you insert the data in your financial calculator?
I/YR (discount rate)
N, PMT, PV+/-, FV theI/YR
What is the formula for Approximate YTM?
AYTM = Interest Income +/- Price change per period / (Purchase price + Par) / 2 X 100
When calculating the PV of a Bond, in what order do you insert the data in your financial calculator?
N, I/YR, PMT, FV then PV
The risk that interest rates will fall causing the cash flows on an investment, assuming that the cash flows are reinvested, to earn less than the original investment.
Reinvestment Risk
The relationship between bonds of varying terms to maturity
Term structure of interest rates
A financial institution typically chooses long-term bonds. Identify the term structure theory this represents.
Market segmentation theory
You believe that the Bank of Canada will begin to tighten monetary conditions this year. If you believe in the expectations theory, identify the correct statement regarding long-term interest rates.
Higher than short-term rates.
What does the normal shape of the yield curve say about interest rates?
Short-term rates are lower than long-term rates.
Justin believes in the expectations theory of the term structure of interest rates. He needs a fixed income investment that matures in 2 years. He is choosing between buying a 2-year bond, or buying a 1-year bond and then buying another 1-year bond after the first one matures. Identify the strategy he should choose.
The return for each strategy should be the same based on the expectations theory.
Tamana requires a 6% real rate of return on her investments. She feels that inflation may climb to 3.5% next year. Calculate the rate of return she should demand from an investment.
9.5%
A measure of the sensitivity of a bond’s price to changes in interest rates
Duration
To earn the greatest return, you should therefore invest in bonds with a ____________ duration when you expect interest rates to decline.
Higher
When interest rates are expected to rise, you should invest in bonds with ____________ duration
Low
Electronic confirmation sent through secure, proprietary systems.
Trade Ticket
A certificate is produced, and detachable coupons are attached to the residual principal payment. Investors detach the coupon and submit it to a bank or other financial institution to receive payment from the issuer on each coupon payment date.
Bearer bonds
Bear the name of the rightful owner and can be sold or transferred only when the owner signs the back of the certificate. Coupon payments are mailed to the registered owner
Registered bonds
Rather than physical certificates, a bookbased format is an electronic record keeping system used by depositories that keeps track of ownership and settlement of securities transactions. In Canada, the national provider of these services is the CDS Clearing and Depository Services Inc
Bonds registered in book-based format
Amount of interest built up during the previous holding period
Accrued Interest
How to determine the appropriate discount rate to use when calculating the price of a bond?
Can be estimated based on the yields currently applicable to bonds with similar coupon, term, and credit quality
What happens to discount rates when inflation rises?
Discount rates go up as investors demand a higher rate of return to compensate for inflation.
If yields on Government of Canada bonds have not changed, but the spread between those bonds and corporate bonds has narrowed, what does that say about the market for the corporate bonds? Are they riskier or less risky?
less risky because they are now trading at a lower yield
The current worth of a sum of money that will be received sometime in the future.
Present Value
Interest accumulated on a bond or debenture since the last interest payment date.
Accrued Interest
Yield curve theory proposing that supply and demand of large institutions shapes the yield curve with banks preferring to borrow short term while other institutions prefer long-term money.
Market Segmentation Theory
The rate used in calculating the present value of future cash flows when computing the value of a bond.
Discount rate
A theory stating that the yield curve is shaped by a market consensus about future interest rates.
Expectations Theory
The quoted or stated rate, such as the quoted or stated rate on an investment or a loan. This rate allows for comparisons but does not account for the effects of inflation.
Nominal Rate
The annual income from an investment expressed as a percentage of the investment’s current value.
Current Yield
The approximate percentage change in the price or value of a bond or bond portfolio for a 1% change in interest rates. Used as a measure of bond price volatility.
Duration
A graph showing the relationship between yields of bonds of the same quality but different maturities.
Yield Curve
A theory that explains the shape of the yield curve by postulating that in order to entice investors to invest long-term, borrowers must offer higher rates for longer-term money.
Liquidity Preference Theory
The risk that interest rates will fall causing the cash flows on an investment, assuming that the cash flows are reinvested, to earn less than the original investment.
Reinvestment Risk
A rate of return adjusted for the effects of inflation.
Real Rate of Return
Rates are going to decline - invest in
Long-Term Low Coupon
If the yield of the bond has fallen below the coupon rate, the price must have _____________
Increased above par
Real Rate =
Nominal Rate - Inflation Rate
What type of bond has the lowest reinvestment risk?
Strip Bond / Zero Coupon Bond
Tells you how much a bon's price will change given a 1% change in market interest rates
Duration
What is the impact of using a lower discount rate when calculating the PV?
It would increase the present value of the bond
If somone bought a T-Bill today, when would it settle?
Today
FTSE Canada Universe Bond Index divides both bonds into smaller sub-indexes. Which is not one of the indexes?
Coupons
How do you calculate interest rate changes in duration?
Duration x Change in interest rates
A group of shares traded in less than a standard trading
unit
Odd Lot
Unit whose size has uniformly been decided upon by the exchanges.
Standard Trading Unit
Registered in the name of the securities firm, rather than the beneficial owner
Street Certificate
An amount distributed out of a company’s profits to its shareholders in proportion to the number of shares they hold
Dividend
If a company is closing down, which holders get paid first?
1. Bond Holders
2. Preferred Shareholders
3. Common Shareholders
What is the benefit of investing $10,000 in common shares to a young investor?
Over the long term, common shares have proven to be the best opportunity for capital gain.
Asad Khan holds 100 common shares of ABC Inc. He purchased his shares two years ago at $37.50. ABC implements a 2:1 split. How many shares would he own?
200
What is a characteristic of restricted shares?
Restricted shares have the right to participate in a company’s assets upon liquidation but do not give the holder full voting rights.
What is a characteristic of dividends?
Reinvested dividends are taxable to the shareholder as ordinary cash dividends even though the dividends are not received as cash
What is a benefit of investing in preferred shares?
Dividends on preferred shares are generally fixed / relatively stable
Minon d’Allaire owns 100 DDF 1st Preferred Cumulative $1.25 shares that she purchased 1 year ago. DDF did not pay a dividend in either of the last 2 years, but has declared dividends for the current year. What is Minon’s entitlement to dividends?
Minon is entitled to all dividends that are currently in arrears and the newly declared dividends (no accrued interest).
Harry is discussing a preferred share investment with his clients Marie and Karin. They are concerned about the smaller size of the market compared to common shares and bonds. What type of risk are Marie and Karin likely referring to?
Liquidity Risk
What type of preferred share can help to mitigate the effects of interest rate changes?
Floating Rate Preferred Shares
A preferred share that may be redeemed upon due notice by the security’s issuer.
Callable Preferred
The automatic reinvestment of shareholder dividends in more shares of the company’s stock.
Dividend Reinvestment Plan - DRIP
Interest or dividends that were not paid when due but are still owed.
Arrears
Investing a fixed amount of dollars in a specific security at regular set intervals over a period of time with a goal of reducing average cost paid per unit.
Dollar Cost Averaging
A legal term meaning that all securities within a series have equal rank or claim on earnings and assets. Usually refers to equally ranking issues of a company’s preferred shares.
Pari Passu
An increase in a corporation’s number of shares outstanding without any change in the shareholders’ equity or market value.
Stock Split
The part of the issued shares that are outstanding and available for trading by the public, and not held by company officers, directors, or investors who hold a controlling interest in the company.
Float
Securities certificates that are registered in the name of the securities firm, rather than the beneficial owner.
Street Certificate
Shares that participate in a company’s earnings and assets (in liquidation), as common shares do, but generally have restrictions on voting rights or else no voting rights.
Restricted Shares
A preferred share that grants the holder the option under specified conditions to force the issuer to redeem the shares.
Retraction
A retraction feature that allows the issuer to redeem retracted shares either for cash or common shares.
Soft Retraction
What results when an investor sells a security for more than its purchase price?
Capital Gain
The arithmetic average of the current prices of a group of stocks designed to represent the overall market or some part of it.
Stock Average
A number of shares which is less than a standard trading unit. Usually refers to a securities trade for less than 100 shares.
Odd Lot / Broken Lot
If you buy shares during this period of time, you will receive an upcoming already-declared dividend.
Cum Dividend
The trading unit which has uniformly been decided upon by the stock exchanges; in most cases it is 100 shares, but this can vary depending on the price of the stock.
Standard Trading Unit
A time series of numbers used to calculate a percentage change of a portfolio of shares over any period of time.
Stock Index
The period of time after the cum dividend period where, when a person purchases a common or preferred share, they are not entitled to the declared dividend payment.
Ex-Dividend
Used to raise the price of a company's shares when their market price is too low
Reverse Stock Split
Used to reduce the price of a company's shares when their market price is too high
Stock Split
Securities designed to give Canadians access to popular U.S. and global companies that trade on the NYSE and NASDAQ, but they are listed on the Canadian NEO Exchange in Canadian dollars.
CDR's - Canadian Depositary Receipts
Method used to increase or reduce the number of underlying shares of the CDR based on how the Canada/U.S. exchange rate changes
CDR Ratio
A retraction feature that forces the issuer to redeem retracted shares for cash only.
Hard Retraction
Pay a fixed quarterly dividend, typically expressed as an annual percentage of the issue price, and have no stated maturity date. Issuers have the right to call or redeem fhem on established dates at prices set at the time of issue.
Fixed-Rate Perpetual Preferred Shares
Pay a dividend monthly or quarterly that adjusts based on either a percentage of the Canadian Bank Prime Rate or the yield on 3-month Government of Canada Treasury bills plus a spread. Do not have a stated maturity date but may can be called by the issuer.
Floating-Rate Preferred Shares
Have fixed dividend rates that periodically change, or reset, according to a formula or process outlined at the time the shares are issued.
Fixed-Reset Preferred Shares
Have an initial 5-year term during which shareholders are paid a fixed dividend rate based on the yield to maturity on the 5-year benchmark Government of Canada bond plus a spread, after which the issuer can call the shares for redemption at the initial offer price. The Shareholders can choose to keep the preferred share or exchanged it for a floating rate preferred share.
Rate-Reset Preferred Shares
Have an initial 5-year term during which shareholders are paid a fixed dividend rate (determined by the issuer and subject to certain minimum conditions specified at the time of issue) after which shareholders have the option to continue recei ing fixed-rate divdends that have been reset or receive a floating-rate preferred share.
Fixed / Floating Preferred Share
What are the risks in investing in preferred shares?
• Interest rate risk
• Credit risk
• Call risk
• Extension risk
• Liquidity risk
What are the benefits of investing in preferred shares?
- Higher yields than bond yields
- Preferential tax treatment
- Portfolio diversification
Determine the investor who is most suitable for a preferred share investment.
A conservative investor seeking tax efficient income
Identify an advantage for an investor that invests in a non-cumulative floating-rate preferred share.
Protection against an increase in interest rates.
Identify the type of preferred share risk if a preferred share does not have a retraction feature.
Extension risk
Identify an advantage for an investor who earns preferred dividends instead of common dividends.
Preferred dividend payments take precedence over common dividends.
Select the status of preferred shareholders in the event of bankruptcy or dissolution of a company.
Rank after creditors and before common shareholders.
Select the type of preferred shares that pay a fixed dividend for a pre-determined amount of time and then may pay a variable dividend.
Rate-Reset
Shares in a company which has another class of shares which have greater voting rights on a per share basis
Subordinate voting
How do you calculate a 3:2 split - 1000 shares
(1000 / 2) x 3 = $1,500
Identify the indicator that is price-weighted and is composed of equally weighted items.
Stock average.
What term best describes preferred share issues that are equal in asset and dividend entitlement?
Pari Passu
Jarod is planning on buying 1,000 shares of WIT Inc. On Monday May 3rd, he reads that WIT just announced a dividend with a record date of the following Monday, May 10. Jarod is hoping to earn capital gains from this investment rather than dividends. When should he buy the shares?
Name an ex-dividend date - Friday May 7
Majority of the votes cast by minority shareholders
Minority Approval
The number of stocks that make up the index is not fixed
A floating number of stocks
Given to existing stockholders that allow them to buy shares in the company at a specified price within a specified period of time
Subscription Rights
A designated dividend amount that will be paid each year barring a major decline in earnings
Regular Dividend
A dividend amount paid at the end of the fiscal year if a company's profits are greater than anticipated
Extra Dividend
A callable preferred share is callable by whom?
The issuer / company
A callable preferred share can be redeemed by whom?
The investor
A responsible investment involves considering what 3 factors when selecting and managing investments?
ESG - Environmental, Social and Governance Factors
Name two examples of circumstances in which a company would issue a preferred share over a common share.
1. Stock Market is falling or inactive
2. Business prospects may be uncertain
With Dividend
Cum Dividend
Which two sectors are weighted the most in the S&P/TSX Composite Index?
Financials and Energy
How is the market capitalization of a stock calculated?
The number of shares outstanding multiplied by the current market value of each shared.
The preferred shareholder may receive a bigger dividend if the company performs well when the preferred share holds what kind of feature?
Participation Feature
On a cumulative preferred share will missed dividends accrue with or without interest?
WITHOUT
When are preferred shares most commonly called?
When they are trading at a premium
When the issuer has the sole ability to determine when it will return the par value to investors
Extension Risk
What does a smaller spread represent?
Stronger creditworthiness
What does a larger spread represent?
Weaker creditworthiness
What type of preferred shares will pay dividend that are adjusted as interest rates change?
Floating Rate Preferred Shares
How are stock dividends treated from a tax perspective?
Exactly like cash dividends
Index calculation that reflects only shares that are included in the float
Float Adjusted Index
What would the issuer of a non-callable preferred share be most concerned about?
The issue will freeze a part of the company's capital structure for as long as the company exists
A class of common shares by which shareholders are given the right to vote only on certain issues
Restricted Shares
What is another name for market-weighted index?
Value-weighted Index
How much of a capital gain is subject to tax?
Half.
What are the two types of investment approaches used by responsible investors?
Values-driven approaches
Valuation-driven approaches
Includes the investors ethical or moral beliefs in their investment approach
Values-driven approaches
Consider the materiality of ESG issues in their investment approach
Valuation-driven approaches
Another term used for the retraction of a preferred share
Pulling Back
What are the index's using price-weighted averages
DIJA
Nikkei
Value Line Composite Index
Price weighted index made up of 30 blue-chip american stocks
DJIA
What is true of the maturity date of fixed rate perpetual preferred shares
There is no maturity date
All else being equal, how would a stock split impact the shares outstanding and the share price?
There would be MORE shares outstanding with a LOWER share price
What type of companies would most likely pay out stock dividends?
Rapidly growing companies
Declining Stock Market
A Bear Market
Inclining Stock Market
A Bull Market
How often is the CDR Ration adjusted
Daily
Assume the same company trades on multiple exchanges. A major change it ints share price without a change in the number of shares outstanding would least impact its weighting on which Index?
DJIA
Which sectors have the greatest weighing on the S&P/TSX Composite Index?
Financials and Energy
Which sectors have the least weighing on the S&P/TSX Composite Index?
Health Care, Utilities and IT
Japan - the Tokyo Stock Exchange average. Updated every 15 seconds.
Nikkei Stock Average (225) Price Index
UK - 100 largest listed companies listed on the London Stock Exchange. Calculated using the market capitalization of the stock and is recalculated on a minute-by-minute basis
The FTSE 100 Index
Germany - 30 major Frankfurt Stock Exchange blue-chip stocks. Weighted by market capitalization. Dividends and income from subscription rights are reinvested in the index.
The DAX Performance Index
France - 40 of the largest 100 companies listed on the Paris Stock Exchange. It is calculated on a market capitalization basis
The CAC 40 Index
Switzerland - 20 of the largest and most liquid blue-chip
stocks on the Swiss market, ranked by market capitalization.
The Swiss Market Index
Market capitalization index that includes all the listed common equities on the New York Stock Exchange. There are additional indices for industrial, transportation, utility, and financial corporations.
The NYSE Composite Index
Market-weighted index is based on all the stocks listed on the NYSE American exchange. A leading exchange for small-cap companies
NYSE American index
Market-weighted index of more than 5,000 issues that are
traded over the counter. This index is dominated by smaller capitalization companies. Its market capitalization is about 30% of the NYSE market capitalization.
The NASDAQ Composite Index
Index of more than 1,600 stocks that is calculated by taking an average of the daily percentage change in each stock within the index. The broadest available barometer of all the U.S. indexes, and includes companies that are listed on the NYSE, NASDAQ, NYSE American, and the TSX.
The Value Line Composite Index
The main gauge for measuring the investment performance of institutional investments in the United States. Weighted by market capitalization and based on a large number of industrial stocks, some financial stocks, some utility stocks, and a smaller number of transportation stocks, which are weighted in the index by their market capitalization.
THE S&P 500
Price-weighted. Made up of 30 blue-chip stocks with a typically lower risk profile. Not a truly representative indicator of broad market activity.
DJIA - Dow Jones Industrial Average
Has a floating number of stocks. Classified by industry. Measures changes in the market capitalization of the stocks in the indexTo be included in the index, a stock must meet specific criteria based on price, length of time listed on the exchange, trading volume, capitalization, and liquidity.
The S&P/TSX Composite Index
60 largest companies that trade on the TSX as measured by market capitalization and is broken down into 11 sectors
S&P/TSX 60 Index
Canadian benchmark index for the public venture capital marketplace. Market capitalization-based index without a fixed number of companies ane is revised quarterly based on specific criteria for inclusion and maintenance policies.
S&P/TSX Venture Composite Index
A time series of numbers used to calculate a percentage change of this series over any period of time. Indicators used to measure changes in a representative grouping of stocks.
Stock Indexes
Arithmetic average of the current prices of a group of stocks designed to represent the overall market or some part of it
Stock Average
Environmental, Social or Governance:
Climate Change
Environmental
Environmental, Social or Governance:
Conservation of natural resources
Environmental
Environmental, Social or Governance:
Waste Management
Environmental
Environmental, Social or Governance:
Water Scarcity
Environmental
Environmental, Social or Governance:
Diversity and Inclusion
Social
Environmental, Social or Governance:
Human Capital Management
Social
Environmental, Social or Governance:
Human Rights
Social
Environmental, Social or Governance:
Indigenous and Community Relations
Social
Environmental, Social or Governance:
Corruption and Bribery
Governance
Environmental, Social or Governance:
Executive Compensation
Governance
Environmental, Social or Governance:
Risk and Crisis Management
Governance
Environmental, Social or Governance:
Supply Chain Management
Governance
A type of brokerage account where the investor is expected to have either cash in the account to cover their purchases or where an investor will deliver the required amount of cash before the settlement date of the purchase
Cash Account
A printed acknowledgement giving details of a purchase or sale of a security which is normally mailed to a client by the broker or investment dealer within 24 hours of an order being executed. Also called a contract.
Confirmation
A buy or sell order that automatically expires if it is not executed on the day it is entered
Day Order
An order to buy or sell that is open until either the order is filled, the client cancels the order, the order expires on a date specified by the client, or the order expires after 90 days
Good Til Order
A client’s order to buy or sell securities at a specific price or better. The order will only be executed if the market reaches or betters that price.
Limit Order
Signifies ownership of securities.
Long Position
The amount of money paid by a client when he or she uses credit to buy a security. It is the difference between the market value of a security and the amount loaned by an investment dealer.
Margin
Account used to buy or sell securities on partial credit. In such cases, the client pays only a portion of the purchase price and the investment dealer lends the balance to the client
Margin Account
A contract that must be completed and signed by a client and approved by the firm in order to open this type of account.
Margin Account Agreement Form
When an investor purchases an account on margin in the expectation that the share value will rise, or shorts a security on the expectation that share price will decline, and share prices go against the investor.
Margin Call
An order placed to buy or sell a security immediately at the best current price
Market Order
An order to buy a stock at or above a certain price
On-Stop Buy Order
Order that is specifically used in connection with a sell order where the limit price is below the existing market price. The order is triggered when the stock drops to the specified level.
On-Stop Sell Order / Stop Loss Order
A type of order for the account of partners, directors, officers, major shareholders, IAs and employees of member firms
PRO order
The date on which a securities buyer must pay for a purchase or a seller must deliver the securities sold
Settlement Date
Created when an investor sells a security that he or she does not own.
Short Position
The sale of a security which the seller does not own
Short Selling
An order to buy a security only after it has reached a certain price
Stop Buy Order
An order to sell a security after its price falls to a certain amount, thus limiting the loss or protecting a paper profit
Stop Loss Order
Buy at the _______ Price
Ask
Sell at the ____ Price
Bid
When does a GTD order expire?
On a date specified by the investor
When does a GTC order expire?
90 calendar days from entry on the TSX unless the investor decides to cancel the trade sooner than the expiry date
Teri is a retail investor. Identify the action Teri must take when there is a deficiency in her margin account.
Deposit additional funds into her account
Identify the action Teri must take if the shares in her account that she has sold short rise in price?
Cover any margin call that results
Identify the risk, unique to short selling, that Teri accepts when she chooses to sell short.
Unlimited loss.
Identify a characteristic of a cash account.
Clients are not granted credit by the investment dealer.
Three months ago, Gunther bought shares of PXY at $12.40. The shares have risen in price and are currently trading at $18.80. Gunther wants to keep the stock, as he thinks it may rise further, but he wants to protect a part of his unrealized profit in the case of a downturn. Identify the type of order his IA should enter for Gunther.
On-stop sell order.
Stella wants to sell her shares in ATP, but only if the sale can be executed at a price of $8 or better. Identify the type of order her IA should enter for Stella.
Limit Order
Mohammed wants to buy 10,000 shares of IMX at the best available price. Identify the type of order his IA should enter for Mohammed.
Market Order
Jeremiah places an order to buy 1,000 QQQ shares. He is going out of town and wants the order cancelled if it cannot be filled within five trading days. Identify the type of order his IA should enter for Jeremiah.
Good Through Order
Pierre sold short 800 shares of GHI and wants to protect himself from an unlimited potential loss. Identify the type of order his IA should enter for Pierre.
On-stop buy order.
Ms. Wells buys CNO shares at $55. She tells her IA that she does not want to lose more than $5 per share on this investment. Identify the type of order her IA should enter for Ms. Wells.
On-Stop Sell Order
An IA wants to buy shares of CBA for her own account. She has determined the quantity of shares she wants to purchase and is ready to enter the order. What is the IA required to write on the trade ticket?
PRO, N-C (non-client), or EMP (employee).
A type of brokerage account where the investor is expected to have either cash in the account to cover their purchases or to deliver the required amount of cash before the settlement date of the purchase.
Cash Account
Also known as a stop loss order; an order that is triggered when a stock drops to the specified level.
on-stop sell order
A client’s order to buy or sell securities at a specific price or better. The order will only be executed if the market reaches or betters that price.
limit order
A type of order for the account of partners, directors, officers, major shareholders, IAs and employees of member firms.
PRO Account
An order placed to buy or sell a security immediately at the best current price.
market order
The initial action a brokerage firm takes when changes in the values of an investor’s securities holdings or cash position results in the investor having insufficient margin in their margin account.
margin call
What type of position does an investor have if they own securities?
Long Position
An order to buy a stock at or above a certain price; used to protect a short position when the stock’s price is rising, or to ensure that a stock is purchased while its price is rising.
on-stop buy order
Account used to buy or sell securities on partial credit where the client pays only a portion of the purchase price and the investment dealer lends the balance to the client.
Margin Account
A buy or sell order that automatically expires if it is not executed on the day it is entered.
day order
A printed acknowledgement, also called a contract, giving details of a purchase or sale of a security which is normally mailed to a client by the broker or investment dealer within 24 hours of an order being executed.
Confirmation
A position created when an investor sells a security that he or she does not own.
short position
An order to buy or sell that is good for a specified number of days and then is automatically cancelled if it has not been filled.
good through order
The amount of money paid by a client when he or she uses credit to buy a security.
margin
A contract that must be completed and signed by a client in order to open a margin account.
Margin Account Agreement Form
IAs entering an order for a short sale of a security for anyone must do what?
Mark sell-order ticket “Short”.
Amount of funds that the investor provides for the security purchase.
Margin
Identify a characteristic of a margin account
A purchase on margin requires only partial payment for purchases from the client.
Identify the characteristics of margin risk
Margin increases market risk.
Client must pay interest during the period the security is margined.
Margin calls must be paid without delay.
The dealer can sell securities from the account to secure its loan without the client’s consent:
Identify a criterion that may require a short sale position to end.
Delisting of the securities sold short.
Identify the individual or group that is liable for payment of the dividend to the investor who lends shares in a short sale.
Short seller.
Vinit recommends purchasing XYZ Corporation based on a positive analyst outlook, and decides that he will also purchase shares. Kareem, a major client, calls and requests 500 shares; an institutional client calls immediately after requesting 300 shares; another client calls requesting that Vinit close a short position. Determine the order that will be executed last.
Vinit
Identify a characteristic of a short sale.
Short seller sells borrowed securities.
Select the most common way for stocks to be held in Canada.
Electronically by the clearing corporation.
Thuy purchases 1,000 shares of XYZ on margin. He contributes the minimum margin amount to his account on the settlement date. Three days later, XYZ falls in price. Identify the action Thuy’s dealer member will take as a result.
Issue a margin call.
Is a stop-buy order most often placed by an investor who is long the shares or short the shares?
Short
The securities listed by CIRO on a quarterly basis that demonstrate high liquidity and low price volatility are eligibile for what?
Reduced margin
When a dealer sells any shares held within an investor's margin account for the purpose of covering a margin call
Sell-out
How often is the interest on a margin loan calculated?
Daily
When must a short seller close his or her position?
At the dealers request - no specific time frame
Is a stop-loss order placed by an investor who is long the shares or short the shares?
Long the shares
When a dealer closes out a short position in a clients account by purchasing the required shares and chargin the clients account
Buy-In
For the purchase of a security in a cash account, when must a payment in full be made?
On or before settlement date
When a stop-buy order is triggered, what type of order does it become?
Market Order
What does "N/C" refer to when it is written on an order ticket?
Non-Client
What is the most an investor can loose after purchasing shares for $10 per share and subsequently placing a stop-loss order at $8 per share?
$10 - if it is a market price it could go at any price, the lowest being $0 so max loss would be $10
How is the interest on a margin loan calculated?
Calculated daily and charged to the account monthly
With a short transaction, the minimum account balance is greater than, less than or equal to the total market value of the short sale?
GREATER than
What type of security is a short seller attracted to?
One the they expect will decline in value and is widely held by many shareholders
How is the interest on a margin loan calculated?
Daily and charged to the account monthly
Someone is considering shorting a stock. What risk do they face with this type of transaction?
He is liable for any dividends or rights paid by the issuer while the account is short
What organization produces and maintains a quarterly list of securities that demonstrate high liquidity and low price volatility, thereby making them eligible for reduced margin?
CIRO
How do you calculate how much many you make or lose when shorting a stock that pays a dividend?
Difference between what goes into the account when the sale happens, what they pay for the share when they buy it back, minus the dividend they have to pay. Multiply then by a trading unit (100) to get the price of the gain/loss (or whatever number or units they consider).
How would you best describe a "short sale"
Selling shares that you don't own
What is a stock dividend?
A dividend paid in stock
What is the advantage of a reverse stock split?
It makes it easier for the company to raise capital
What is the benefit of a CDR?
Lower price per share
Name the country of the index:
Nikkei
Japan
Name the country of the index:
DAX
Germany
Name the country of the index:
CAC
France
Name the country of the index:
SMI
Switzerland
Name the country of the index:
FTSE
UK
Financial contract between two parties whose value is derived from or dependent on the value of an underlying asset, commodity, or other investment
Derivative
Financial asset (such as a stock or bond), a currency, a futures contract, an index, or even an interest rate. Can also be a real asset or commodity, such as crude oil, gold, or wheat.
Underlying Asset
A right to buy or sell specific securities or properties at a specified price within a specified time. The buyer pays a premium to the seller.
Call Option
If the underlying stock's price is expected to rise, what type of option would an investor buy?
A call option
The price at which a bond or preferred share with a call feature is redeemed by the issuer
Call Price
The amount the holder of the security would receive if the security was redeemed prior to maturity
Call price
The call price is equal to......
Par plus any call premium
A right to sell the stock at a stated price within a given time period.
Put Option
If the underlying issue is expected to go down, what type of option would an investor buy?
Put Option
An option that gives its owner the right to buy the underlying asset is a.......
Call Option
An option that gives its owner the right to sell the underlying asset is a.....
Put Option
What is the fundamental difference between options and forwards?
With forward contracts both parties (buyer and seller) oblige themselves to trade the underlying asset in the future at a price agreed upon today. With an option contract, only the seller is obliged - the buyer has the right to buy or sell.
What are the 3 features of all derivaties?
1. Contractual agreements between two parties - a buyer and a seller.
2. They have a price upon which the buyer and seller must agree.
3. They have an expiration date. Both must fulfill their obligations or exercise their rights on or before the expiration date. After that, the contract automatically terminates.
No upfront payment is required for.....
Forwards
The buyer makes a payment to the seeler when the contract is drawn up.
Options
What is often required upon entry into a futures contract giving the parties to a contract a higher level of assurance that the terms of the contract will eventually be honoured.
Performance Bond
Often referred to as margin in a forward
Performance Bond or a Good Faith Deposit
A deposit of money by the buyer or seller of a futures product which acts as a financial guarantee as to the fulfilment of the contractual obligations of the futures contract.
Good Faith Deposit
Are considered a zero-sum game: a gain by one counterparty is exactly offset by the loss to the other counterparty.
Derivatives
Loosely connected and lightly regulated network of dealers who negotiate transactions directly with one another. Negotiations take place primarily over the phone or through computer terminals. Has no trading floor and no regular trading hours. Private. Unregulated
OTC Derivatives
Legal corporate entity organized for the trading of derivative contracts. Has both a trading floor and an electronic trading system. Stipulates the rules and regulations governing trading in order to maintain fairness, order, and transparency in the marketplace. Public. Easily terminated and transferable. Regulated
Exchange-Traded Derivatives
What is a major concer of OTC derivatives?
Default Risk
The risk that one of the parties to a derivative contract will not be able to meet its obligations to the other party
Default Risk
Market restricted to large institutional and corporate customers
OTC market
Service organization that clears, issues, settles, and guarantees options, futures, and futures options traded on the Bourse de Montréal (the Bourse).
CDCC - Canadian Derivatives Clearing Corporation
Guarantee the financial obligations of every party and contract. Become the buyer for every seller and the seller for every buyer.
Clearinghouses
What are the two general categories of underlying assets for derivatives contracts?
Commodities
Financial Assets
What are the most commonly used financial derivatives?
Equities
Interest Rates
Currencies
What are the 4 Groups of Derivative Users?
Individual Investors
Institutional Investors
Businesses and Corporations
Derivative Dealers
A transaction intended to reduce the risk of loss from price fluctuations
Hedging
Can only trade Exchange-Traded Derivatives
Individual Investors
Can trade Exchange-Traded Derivatives and OTC Derivatives
Institutional Investors
The simultaneous purchase of a security on one stock exchange and the sale of the same security on another exchange at prices which yield a profit.
Arbitrage
A method of boosting returns on an underlying investment portfolio by taking a speculative position based on expectations of future market movements.
Yield Enhancement
Use derivatives primarily for hedging purposes
Corporations and Businesses
The long position or holder in an options contract
Buyer
The short position or writer in an options contract
Seller
An option that gives its holder the right to buy, and the seller the obligation to sell, the underlying asset
Call Option
An option that gives its holder the right to sell, and its writer the obligation to buy, the underlying asset
Put Option
The price at which the underlying asset can be purchased or sold in the future
Strike Price
A futures or option transaction that is the exact opposite of a previously established long or short position.
Offsetting Transaction
The amount paid to enter into an option contract, paid by the buyer to the seller or writer of the contract
Option Premium
What is the most that the buyer of an option can loose?
The premium paid
The date on which certain rights or option contracts cease to exist
Expiration Date
What day do options expire usually?
The 3rd Friday of the expiration month
When are weekly options listed for trading?
Thursdays
What day to weekly optios usually expire?
Any of the 5 Fridays following the listing week
When can American-Style options be exercised?
At any time, up to and including the expiration date.
When can European-Style options be exercised?
Only on the expiration date
What style of options are most index options?
European-Style Options
Long-term option contract offering the same risks and rewards as a regular option
Long-Term Equity Anticipation Securities
Occurs when an investor establishes a new position in an option contract
Opening Transaction
Transaction that results in a long position in the option
Opening Buy Transaction
Transaction that results in a short position in the option
Opening Sell Transaction
On or before an options expiration date, what 3 things can happen to all long and short option positions?
- The position will be offset
- The party holding the long position will excercise the option
- The party holding the long position will let the option expire worthless.
How do you offset a long position?
By selling the same type and number of contracts
How do you offset a short position?
By buying the same type and number of contracts
How can you offset OTC options?
Through negotiations between the long and short parties
How do you offset exchange-traded options?
Simply by entering an offsetting order on the exchange on which the option trades
When the price of the underlying asset is higher than the
strike price, the option is said to be ......
In-The-Money
When is a call option in-the-money?
When the price of the underlying asset is higher than the strike price
When is a Put Option in-the-money?
When the price of the underlying asset is lower than the strike price
When the price of the underlying asset equals the
strike price
Call and Put Options are At-The-Money
When is a call option out-of-the-money?
When the price of the underlying asset is lower than the strike price
When is a put option out-of-the-money?
When the price of the underlying asset is higher than the strike price
That portion of a warrant or call option’s price that represents the amount by which the market price of a security exceeds the price at which the warrant or call option may be exercised.
Intrinsic Value
Value of certainty
Intrinsic value
How do you calculate the intrinsic value of an in-the-money call option?
Price of Underlying − Strike Price
How do you calculate the intrinsic value of an in-the-money put option?
Strike Price − Price of Underlying
If an option is not in-the-money what is its intrinsic value?
Zero
The value of uncertainty
Time Value
The amount that an option is trading above its intrinsic value
Time Value of an option
How do you calculate the time value of an option?
Option Price − Option’s Intrinsic Value
How do you calculate the price of an option?
Intrinsic Value + Time Value
The total number of option contracts in the series that are currently outstanding and have not been closed out or exercised
Open Interest
What are the two investment strategies in mind when buying call options?
- To Speculate in the hope of earning a profit
- To Manage Risk
Forwards can be traded on where?
An exchange or OTC
Futures can be traded on?
Exchange
Delivery involves an exchange of cash from one party to the other.
Cash-Settled Futures
If the price agreed to in the futures contract is greater than the price of the underlying asset at expiration who pays who?
The long must pay the short (prices have fallen)
If the price agreed to in the futures contract is less than the price of the underlying asset at expiration, prices have risen, who pays who?
The short must pay the long (prices have risen)
Margin Required when the futures contract is entered into
Initial/Original Margin
Minimum account balance that must be maintained while the futures contract is still open
Maintenance margin
The process in the futures market in which the daily price changes are paid by the parties incurring losses to the parties earning profits.
Marking to Market
Buying a futures contract to profit from the expectation of rising prices is what type of strategy?
Speculative Strategy
Buying a futures contract to lock in a purchase price is what type of strategy?
Risk Management strategy
Selling a futures contract simply to profit from an expectation of lower prices is what type of strategy?
Speculative Strategy
Selling a futures contract to lock in a selling price is what type of strategy?
Risk Management Strategy
What is a way for a companyt to raise capital quickly and cost-effectively?
By issuing rights or warrants
Securities that give their owners the right, but not the obligation, to buy a specific amount of stock at a specified price on or before the expiration date
Rights or warrants
What are the expiration dates of rights and warrants?
- Rights - very short term; usually 4-6 weeks after issued
- Warrants - 3-5 years to expiration
A privilege granted to an existing shareholder to acquire additional shares directly from the issuing company
Rights
The price shareholders pay to purchase additional shares of the company
Subscription Price / Oferring Price
The business day before the record date shares trade....
Ex-Rights
Between the date of the announcement that rights will be issued and the ex-rights date, the stock is said to be trading----
Cum-Rights
How do you calculate the Intrinsic Value of Rights During the Ex-rights Period
(S - X) / N where:
S - The market price of the stock
X - the excercise or subscription price of the rights
N - the number of rights needed to buy a share
How do you calculate the Intrinsic Value of Rights During the Cum-RIghts Period?
(S - X) / (N + 1), where:
S - The market price of the stock
X - The exercise or subscription price of the rights
N - The number of rights needed to buy one share
Canadian trading practice requires that a rights transaction be settled by when?
The second business day after the transaction takes place
A security that gives its holder the right to buy shares in a company from the issuer at a set price for a set period of time
Warrants
What is the primary difference between warrants and call options?
Warrants are issued by the company itself whereas call options are issued (written) by other investors.
Often issued as part of a package that also contains a new debt or preferred share issue
Warrants
Known as a sweetner
Warrants
The amount by which the market price of the underlying common stock exceeds the exercise price of the warrant
Intrinsic Value
The amount by which the market price of the warrant exceeds the intrinsic value
Time Value of a Warrant
Why do investors buy warrants?
Because of their leverage potential
The quotation for ABC Inc. is $32.00 and the ABC October 30 call option trades at $3.45. What is the exercise price for this October call?
$30
When is it in-the-money?
When the strike price for the call is lower than the market value and the strike price for the put is higher than the market value
When is it out-of-the-money?
When any call with a strike price above the market value and any put with a strike price below the market value
For a call holder what does the exercise price represent?
The maximum buying price for the underlying asset
If the holder exercises an option, what is the obligation of a put option writer?
Purchase the underlying asset and pay the exercise price
If the option is exercise by the holder, what is the obligation of a all writer?
To deliver the underlying asset and receive the exercise price
Which security has many of the same features as a call option?
Warrant
DEF is trading at $10 and Prachi buys DEF Oct. 12 puts for $2.30. What right can Prachi exercise up to October?
The right to sell DEF at $12
XYZ is trading at $25 and Arjun sells 1 XYZ 28 Dec. Put for $5. Which would be the correct statement regarding this option position?
Arjun received a $500 premium for the obligation, if called on to do so, to buy XYZ at $28 per share.
ABC is trading at $40 and Laura buys ABC November 38 calls. How are the ABC November 38 calls trading?
In-the-money and therefore she would have to pay a higher premium for them
José is short an option that expires in-the-money. What is likely to happen at expiry?
Assignment on that contract should be expected
Vasile buys American-style call options. Identify the correct statement regarding this option position.
Vasile has the right to purchase the underlying asset at any date prior to and including the expiration date.
Larisa purchased 5 put options on MON stock. Calculate the number of shares of MON Larisa must have in her account.
500
Melanie sold 4 GHI June 50 calls for $2 per contract. Calculate the amount Melanie will receive if her calls are assigned.
$20,000 (4x100x50)
What common types of underlying assets are usually used for forward agreements?
Interest rates and currencies
Which is the correct statement regarding the obligations of an investor who purchased a future?
The investor who is long must accept delivery of the underlying asset and pay the agreed upon price
What futures trade on the Montreal Exchange?
Index Futures
It has been a very wet summer in western Canada and wheat crops are predicted to be poor. Marvelous Bread, an international Canadian-owned bread company, is concerned about the price of the wheat that it needs to buy over the next few months. Identify a strategy that would reduce the risk of the price of wheat increasing.
Marvelous Bread could buy wheat futures to hedge the risk of the increased price.
What is the typical margin that is required for futures?
3% to 10% of the contract's value
What is the difference between owning a put and a call?
Owning a call gives the owner the right, but not the obligation, to buy a specific quantity of an underlying asset in the future at an agreed-upon price. Owning a put gives the owner the right, but not the obligation, to sell a specific quantity of an underlying asset in the future at an agreed-upon price.
strike price, the premium, the expiration date, the contract size, and American and European options are?
The strike price is the price at which the underlying asset will be bought or sold if the option is exercised. The premium is the price of the option contract. The expiration date is the date that the option ceases to exist. The contract size is the size or amount of the underlying asset represented by one option contract. American-style options can be exercised at any time, up to and including the expiration date. European-style options can be exercised only on the expiration date.
Let’s say that I buy an equity option: five ABC Dec 25 calls have a premium of $2.50. ABC shares trade at $30, and I exercise the call options. What’s my cost for the ABC shares I own?
As an equity option, ABC has 100 shares per contract, so five contracts equal 500 shares. The cost of the option contract is $1,250 (500 x $2.50), and the cost of the shares purchased through the exercise is $12,500 (500 x $25), bringing the total cost of the shares to $13,750 ($12,500 + $1,250).
In-the-money / out-the-money
If an option position is in-the-money, the option owner (holder) would be in a profit position if the option were exercised. If an option position is out-of-the-money, the option owner (holder) would be in a loss position if the option were exercised. When a call is in-the-money, the price of the underlying asset is higher than the strike price. When a put is in-the-money, the price of the underlying asset is lower than the strike price.
The strike price of a put option is $50 and the shares are trading at $48. I buy a contract for a premium of $4.25. How would I calculate the intrinsic value and the time value?
If the put has a strike price of $50 and the shares are trading at $48, the put is in-the-money because you can sell the underlying shares to the option writer for more than you could on the open market. The intrinsic value of the put premium is $2 ($50 – $48 = $2). The time value of the option premium is $2.25 ($4.25 – $2 = $2.25).
A written call option where the writer owns the underlying stock and uses this position to meet their obligations if assigned.
Covered Call
A call option contract sold by an investor who does not own an offsetting position in the underlying security or a suitable alternative.
Naked Call
A contract that signifies an agreement between a futures buyer and futures seller.
futures contract
The price, also known as the exercise price, that is specified in an option contract, at which the underlying security will be purchased in the case of a call or sold in the case of a put.
strike price
When the purchaser of a common share would not be entitled to a rights offering.
Ex-rights
The amount, if any, by which the current market price of a right, warrant or option exceeds its intrinsic value.
Time value
An option with a strike price equal to the market price of the underlying security.
At-the-money
The total number of outstanding option contracts for a particular option series.
Open Interest
The risk that a debt security issuer will be unable to pay interest on the prescribed date or the principal at maturity.
Default risk
The process in the futures market in which the daily price changes are paid by the parties incurring losses to the parties earning profits.
Marking to market
The kind of option that gives you the right to sell a stock at a stated price within a given time period.
Put option
Writing a put option and setting aside an amount of cash equal to the strike price.
Cash-secured Put Write
An option that can only be exercised on a specified date – normally the business day prior to expiration.
European-style option
How do you refer to a call option with a strike price below the current market price of the underlying security?
In-the-money
Also known as a performance bond or margin: a deposit of money by the buyer or seller as a financial guarantee for a futures contract.
good-faith deposit
An option that can be exercised at any time during the option’s lifetime.
American-style option
How do you refer to a put option where the market price of the underlying security is above the strike price?
Out-of-the-money
A certificate issued by a corporation with an expiry as long as two years that gives the holder the right to purchase securities at a stipulated price within a specified time limit.
Warrants
What is the primary reason an investor would write a covered call option?
Earn additional income
Is the writer of a call option bullish or bearish on the underlying security?
Bearish
What is another name for intrinsic value?
Value of Certainty
When does the trading of rights cease on the TSX and TSX Venture Exchanges?
On the expiration date of the rights at 12pm (noon)
The exchange on which futures options on agricultural commodities trade
ICE Exchange
What is a married put?
Owbning a put while owning the underlying shares
Which options are mosty European Style?
Index Options
What is a unique characteristic of OTC Derivatives
There is no third-party guarantor
All else being equal what is true regarding the intrinsic value of a right?
It is greater in the ex right period
What is a unique feature of equity index future contracts
They are cash settled
What involves two parties agreeing to a series of exchanges in the future
A Swap
What derivative product is similar to a series of forward contracts packaged together
Swap contracts
The extent of default risk depends on.....
Wheether the derivative trades on an exchange or OTC
Which kind of contract represent the most default risk to the holder?
Forward Contracts
A form of business organization that involves one person running a business whereby the individual is taxed on earnings at their personal income tax rate.
Sole Proprietorship
Unlimited Liability
Sole Proprietorship
A form of business organization that involves two or more people contributing to the business and legislated under the federal Partnership Act
Partnership
All partners involved are responsible for the day-to-day operations and have unlimited liability.
General Partnership
There is one general partner and a limited partner who cannot participate in the day-to-day business. General partner has unlimited liability and limited partner has limited liability since they only put up the income, nothing more.
Limited Partnership
A type of partnership whereby a limited partner cannot participate in the daily business activity and liability is limited to the partner’s investment.
Limited Partnership
A form of business organization created under provincial or federal statutes which has a legal identity separate from its owners. The shareholders have no personal liability for its debts (limited liability).
Corporation
What is the fiscal year for a sole proprietorship?
Calendar Year
What is the fiscal year for a Limited Partnership?
Calendar Year
What is the fiscal year for a Corporation?
Can be determined by the corporation - not necessarily the calendar year (Jan-Dec)
What business structure can raise funds by issuing equity or debt
Corporation
What are the advantages of Incorporations?
Limited Liability
Continuity of Existence
Ease of Transfer of Ownership
Ability to raise capital by selling shares or issuing debt
Professional Management
What are the disadvantages of Incorporations?
Double Taxation - taxes and dividends
Filing and Regulatory Requirements and Costs
What corporations are listed on an exchange?
Public Corporations
What corporations are not listed on an exchange?
Private Corporation, has less than 50 shareholders
What are Corporations Regulated by?
Federal/Provincial Acts
Own Charter
Its By-Laws
Anybody on the Board of Directors of a Corporation is called a
Director
Anybody on the Management Team of a Corporation is referred to as
An Officer
What roles in the structure of a corporation can be one and the same?
Chairman and President
The shareholders of a corporation risk only the amount of money they have invested in the corporation’s common shares.
Limited Liability
A corporation’s continued existence is not affected by the death of any or all of its shareholders
Continuity of Existence
Shareholders of a public corporation can usually transfer their shares to other investors with relative ease
Transfer of Ownership
Raising capital by issuing different classes of shares and debt instruments is much easier for corporations than for sole proprietorships or partnerships
Ability to Finance
The shareholders are the ultimate owners of the corporation, but they play a very small part in its management.
Professional Management
Prepared at the time of incorporation and contains rules that govern the conduct of the corporation
General By-Law
What provisions are forseen in corporation by-laws?
• Shareholders’ and directors’ meetings
• Qualification, election, and removal of directors
• Appointment, duties, and remuneration of officers
• Declaration and payment of dividends
• Date of fiscal year end
• Signing authority for documents
Written authorization given by a shareholder to someone else, who need not be a shareholder, to represent him or her and vote his or her shares at a shareholders’ meeting
Proxy
Document sent to shareholders with a proxy, providing details of matters to come before a shareholders’ meeting
Information Circular
An arrangement to place the control of a company in the hands of certain managers for a given period of time, or until certain results have been achieved, by shareholders surrendering their voting rights to a trustee for a specified period of time.
Voting Trust
A corporation that is undergoing a restructuring because of financial difficulties may be placed under the control of a few individuals through a what?
Voting Trust
For how long is a voting trust usually put into place for?
Specific periods, or until certain results have been achieved
To whom do shareholders transfer voting control?
Trustees - usually a trust company - under a voting trust agreement
Who elects the chairman of the board?
Board of Directors
Who elects the President?
Board of Directors
Who elects the vice-president?
President
They are corporate employees responsible for the day-to-day operation of the business.
Officers
Who elects the officers?
Board of Directors
Preside over meetings of the board and generally exert great influence on the management of the affairs of the corporation.
Chairman of the Board
Persons in this position exercise authority through the other officers and through the heads of departments or divisions.
President
What company structure set company policies by passing resolutions.
Directors
What company structure appoints and supervises officers and signing authorities for banking, budget approval, financing, and plans for expansion
Directors
What company structure is personally responsible for employee wages, declared dividends, and government remittances.
Directors
What company structure is normally responsible for the decision to issue shares and declare dividends and other dispositions of profits.
Directors
What characteristics are mandatory of a director?
Must be of the age of majority
Must be of sound mind
Must not be an undischarged bankrupt person.
What company structure sets company policies by passing resolutions.
Directors
What role can a CEO play within a company structure?
Chairman of the Board
What company structure leads specific areas of the corporation’s operations, such as sales or finance.
Vice-President
If the Chariman of the Board of a Corporation is absent, who fills his place?
President
Statement of Financial Position is also knows as
Balance Sheet
What is the formula for Assets?
Assets = Liabilities + Owners Equity
In what order are assets presented on a statement of financial position?
Most liquid to least liquid
A globally accepted high-quality accounting standard already used by public companies in over 100 countries around the world.
IFRS - International Financial Reporting Standards
Accounting standards that are principles-based, with a focus on detailed disclosure
IFRS
Accounting standards that are a mix of rule- and principles-based accounting used in the USA
GAAP
act as an assessment of the company’s financial health and as an overview of its operations: they show what the company owns and how it was financed, as well as how much money it earned or lost over a given period (typically, one year).
Financial Statements
Shows a company’s financial position on a specific date.
Statement of Financial Position
What is the specific date used on a statement of financial assets?
Last day of the corporations fiscal year
What is the fiscal year end of banks and trust companies?
October 31st
Represents the total value of a company’s assets that shareholders would theoretically receive if the company were liquidated.
Equity
Assets which in the normal course of business would not be converted into cash.
Non-Current Assets
Property, Plant, and Equipment are what type of assets?
Non-Current Assets
What are considered non-current assets?
Property, Plant, and Equipment
Systematic charges against earnings to write off the cost of an asset over its estimated useful life because of wear and tear through use, action of the elements, or obsolescence. It is
a bookkeeping entry and does not involve the expenditure of cash
Depreciation
Refers to consumption of natural resources that are part of a company’s assets. Producing oil, mining and gas companies deal in products that cannot be replenished and as such are
known as wasting assets. Does not involve the expenditure of cash.
Depletion
The gradual writing off of intangible assets such as patents or trademarks
Amortization
The amount recorded as depreciation each year is based on what?
The original cost of each asset, its expected useful life,
and any residual value.
What are the two commonly used methods of calculating depreciation?
Straight Line Method
Declining Balance Method
What method of calculating depreciation applies an equal amount to each period, and is the method used most frequently
in Canada by public companies
Straight Line Method
What method of calculating depreciation applies a fixed percentage, rather than a fixed dollar amount, to the outstanding balance to determine the expense to be charged in each period which is then deducted from the capital asset balance to determine the amount against which the percentage will be applied in the subsequent period?
Declining Balance Method
How do you calculate the straight-line method of depreciation?
(Original Value Residual Value - Annual Depreciation Expense) /
Expected Life
The probability that a regular customer of a company will continue to do business with that company because of its location or its reputation for fair dealing and good products
Goodwill
Where do expenses get recorded?
The Statement of Comprehensive Income
Where do Assets get recorded?
The Statement of Financial Position
Recording an expenditure initially as an asset on the statement of financial position rather than as an expense on the statement of comprehensive income, and then writing it off or amortizing it (as an expense on the statement of comprehensive income) over a period of years.
Capitalization
Non-monetary assets that do not have physical substance
Intangible Assets
Shows as the excess of the amount paid for the shares over their net asset value.
Goodwill
What type of assets can be sold, licensed, or transferred, but they usually decline greatly in value when a company is liquidated
Intangible assets
Patents, copyrights, franchises, and trademarks are what kind of assets?
Intangible assets
The degree of ownership that a company has in another company
Investment in associates
When can it be presumed that significant influence of a company exists?
When a company owns at least 20% – but less than half – of the
voting rights of the other company
Assets that will be realized, consumed, or sold in the normal course of business, typically within one year
Current Assets
What are examples of Current Assets?
- Inventory
- Prepaid Expenses
- Trade Receivables,
- Cash and Cash equivalents
Why are Current Assets considered the most important group of assets>
Because they largely determine a firm’s ability to pay its day-to-day operating expenses
The goods and supplies that a company keeps in stock.
Inventory
Uses the average of the total cost of the goods purchased over the period on a per unit basis.
Weighted-Average Method
Method that implies that items acquired earliest are assumed to be used or sold first
FIFO - First-In-First-Out
Payments made by the company for services to be received in the near future
Pre-paid Expenses
What are some examples of pre-paid expenses?
Rents, insurance premiums, and taxes, when paid in advance,
Represents money owing to a company for goods or services it has sold
Trade Receivables
Management’s estimate of the amount that will not be collected
Allowance for Doubtful Accounts
Represents cash on hand, funds in the company’s bank accounts, or funds held in short-term investments
Cash and Cash Equivalents
Money paid in by shareholders for its shares at the time they were issued
Share Capital
When does the value for share capital change?
Share capital does not change from year to year unless the company issues new shares or buys back outstanding shares.
The profits earned over time that have not been paid out as dividends—in other words, the portion of annual earnings retained by the company after payment of all expenses and the distribution of all dividends
Retained Earnings
If a company suffers a loss in any year, the loss is deducted fromn where?
Its retained earnings
The interest or ownership that outsiders have in the subsidiary company
Non-controlling interest
When does Non-Controlling interest appear as a category on a statement of financial position?
When a company owns more than 50% of a subsidiary company and consolidates its financial statements
Debt that is due in annual instalments over a period of years, or else in a lump sum in a future year
Long-Term Debt
What are the most common types of long-term debt?
Mortgages, bonds, and debentures.
Where are long-term debt liabililties described on a financial statement?
In the notes section
Represents income tax payable in future periods
Deferred Tax Liabilities
Result from temporary differences between the book value of assets and liabilities as reported on the statement of financial position and the amount attributed to that asset or liability for income tax purposes.
Deferred Tax Liabilities
Debts incurred by a company in the ordinary course of its business that must be paid within the company’s normal operating cycle (typically, one year).
Current Liabilities
What are Long-term Debt and Deferred tax Liabilities considered?
Non-Current Liabilities
What are the four common types of current liabilities?
• Current portion of long-term debt due in one year
• Taxes payable to the government in the near term
• Trade payables (unpaid bills for items such as raw materials and supplies)
• Short-term borrowings from financial institutions
A = L = OE
Statement of Financial Position
How much money a company earned during the year compared to how much money it spent
Statement of Comprehensive Income
What does the statement of comprehensive income reveal about a company?
• Where earnings come from
• Where earnings go
• The adequacy of earnings, both to assure the successful operation of the company and to provide income for the holders of its securities
Describe the structure of the statement of comprehensive income.
It has three parts: revenue, cost of sales, and gross profit. The gross profit is he amount remaining after the cost of sales is subtracted from revenue. Other income is then added and general expenses are subtracted to arrive at total
comprehensive income.
Consists of income made from the sale of products or services
Revenue
Expenses that arise in producing the income received from the sale of the company’s products or services
Cost os Sales
Measures the margin of profit or spread between the cost of goods produced for sale and revenue.
Gross Profit
When compared to the same figure of other companies, provides an indication of whether the company’s merchandising operations are more or less successful in producing profits than its competitors
Gross Profit
Income is not directly related to a company’s normal operating activities
Other Income
Give some examples of other income?
Dividends and interest from investments, rents, and sometimes profits from the sale of PP&E
Occurs when one company’s investment in another company creates significant influence without gaining control (at least 20% but less than half) , and when each company has its own financial statements
Share of Profit of Associates
Primarily used for ownership holdings that do not result in significant influence (traditionally ownership of less than 20%) and where investments in other companies are reported in the form of investments on the financial statements
Cost Method of Accounting
What amount is transferred to the statement of changes in equity?
Total Comprehensive Income
Used to record changes to each component of equity, including share capital and retained earnings and any changes in non-controlling interest.
Statement of Changes in Equity
Profits earned over the years that have not been paid out to shareholders as dividends
Retained Earnings
Provide a record of the total comprehensive income kept in the business year after year
Retained Earnings
Shows how the company’s financial position changed from one period to the next by showing how the company generated and spent its cash during the year
The Statement of Cash Flow
Helps the reader to evaluate the liquidity and solvency of a company and assess its overall quality.
The Statement of Cash Flows
Define the structure of the Statement of Cash Flows
FIO
• Financing Activities - dividends
• Investing Activities (indirectly affect)
• Operating Activities (directly affect)
and finally the Change in Cash Flow
Represents changes in the various asset and liability accounts that appear on the statement of financial position
Change in Net Working Capital
Detailed information about a company’s financial condition must be disclosed in the shareholders’ interest where?
Notes to the Financial Statements
Who appoints the auditor of a company and when?
Appointed at the company’s annual meeting by a resolution of the shareholders.. The auditor may also be dismissed by them.
For what types of corporations are audits not necessary?
Privately held corporations when ALL shareholders have come to that agreement
Non-current assets are shown at market value or book value?
Book Value
What information does the statement of financial position provide?
A snapshot of a company’s operations at a specific date.
Identify the purpose of the statement of comprehensive income.
To show a company’s profitability for a given period.
Identify the purpose of the retained earnings that are recorded in the statement of changes in equity.
To record the profits kept in the business.
Identify the purpose of the statement of cash flows.
To show how a company generated and spent its cash during the period.
Identify what information the notes to financial statements provide.
Details about the company’s financial condition not reported in the actual financial statements.
How is the amount for property, plant and equipment (PP&E) calculated on NFR’s statement of financial position?
The original cost of the asset less an amount for accumulated depreciation.
Let’s assume that property, plant and equipment (PP&E) includes just one machine that was purchased for $1,000,000. NFR uses the straight-line amortization method. The equipment is expected to have a useful life of 10 years and a salvage value of $150,000. Calculate the carrying amount that NFR will report on its statement after five years of depreciation.
$575,000
If they want to show a higher profit in the first few years of using a new machine, which method should they use?
In the first year, the straight-line method creates a lower depreciation expense than the declining-balance method, but in later years, it creates a higher depreciation expense. The straight-line method will therefore result in more profit in the first few years.
Which non-cash item is subtracted from the statement of cash flows rather than added?
The share of profits of associates is subtracted because the parent company does not actually receive any of the profits from the associate company.
A financial statement which shows a company’s revenues and expenditures resulting in either a profit or a loss during a financial period.
Statement of Comprehensive Income
A financial statement showing a company’s assets, liabilities and equity on a given date.
Statement of Financial Position
Cash and assets which in the normal course of business would be converted into cash, usually within a year, e.g., accounts receivable, inventories.
Current Asset
A company whose shares are listed on a stock exchange or traded over the counter.
Public Corporation
The act of a public corporation complying with continuous disclosure requirements set out by the relevant provincial securities act.
Continuous Public Disclosure
Money owed and due to be paid within a year, e.g., trade payables.
Current Liabilities
A current liability on the statement of financial position that reflects the money owed by a company for goods or services purchased, payable within one year.
Trade Payables
A current asset on the statement of financial position that reflects the money owed to a company for goods or services it has sold, for which payment is expected within one year.
Trade Receivables
An arrangement whereby shareholders surrender voting rights to a trustee, thereby placing control of a company in the hands of certain managers for a given period of time, or until certain results have been achieved.
Voting Trust
A form of business organization that involves two or more people contributing to the business and legislated under the federal Partnership Act.
Partnership
An intangible asset on the statement of financial position that is understood to represent the value of a well-respected business.
Goodwill
Trading in a security by someone who has access to non-public material information.
Insider Trading
Companies that have charters that restrict transferability of shares, number of shareholders, and prohibit shareholders from inviting the public to subscribe for their securities.
Private Corporation
A non-cash bookkeeping entry that records systematic charges against earnings to write off the cost of an asset over its estimated useful life.
Depreciation
A change in the affairs of a company that is expected to have a significant effect on the market value of its securities.
Material Change
Written authorization given by a shareholder to someone else, who need not be a shareholder, to represent him or her and vote his or her shares at a shareholders’ meeting.
Proxy
A form of business organization that involves one person running a business whereby the individual is taxed on earnings at their personal income tax rate.
Sole Proprietorship
The cumulative total of annual earnings held onto by a company after payment of all expenses and dividends.
Retained Earnings
If a company suffers a loss, it is deducted from where?
Retained earnings
If there is a material error or a misrepresentation in the prospectus, the client has a certain time period during which he or she can cancel a contract for the purchase of securities if he or she becomes aware of that misrepresentation
Right of Rescission
Within how many days of a txs listed company's fiscal year-end is it required to provide its audited financial statements?
90 Days
What accounting activity will record an expenditure as an asset rather than an expense?
Capitalization
How would an increase in a companys share price impact the company's book value per share?
It would have no impact
Within how many days of a TSX Venture Exchange listed company's fiscal year-end is it required to provide its audited financial statements?
120 Days
What is the maximum number of shareholders a private corporation can have?
50
How is a company's book value calculated?
Assets - Liabilities
Based on the right of withdrawal, how many days are there for an investor to change their mind?
2 business days
What is another term for equity?
Book value
Special shares that are entitled to vote and receive dividends but cannot be transferred or sold without approval
Escrowed Shares
A takeover bid is an offer to purchase outstanding voting shares that will bring the individual's (or organization's) ownership above what percentage?
20% of the voting shares
What does the Statement of Cash Flows start with?
Profit
How would you calculate a client's net worth?
Assets - Liabilities
When does the IFRS accounting system require the depreciation method and estimated life of the asset to be reviewed
Annually
What term is used to refer the writing off of a wasting asset?
Depletion
How would the payment of a stock dividend impact a corporation's working capital?
It would have no impact on its working capital
Where on a company's cash flow statement would dividends paid to shareholders be recorded?
Financing Activities
How do you calculate annual depreciation under straight line method?
(Cost of equipment - salvage value)/years
Early warning rules must be released if an individual or group of individuals acquires more than what percentage of outstanding voting shares of a company?
10% or more
On a financial statement, if a figure is in brackets, what does it mean?
It is a negative number
Is it possible for a company to have negative retained earnings?
Yes. If over the years more losses than earnings accumulate there will be a deficit
What groups coexist in the Investment Dealer Finance Department?
Government Finance
Corporate Finance
What department hels corporations and governments achieve their funding targets by acting as an intermediary between investors and the issuer os debt and equity securities?
Investment Dealer Finance Department
A distribution method used in particular by the Bank of Canada in distributing new issues of government marketable bonds
Competitive Tender
System where securities are issued by way of an auction, whereby the amount won at the auction is based on the bids submitted
Competitive Tender
A method of distribution used in particular by the Bank of Canada for Government of Canada marketable bonds.
Non-competitive Tender
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
Non-competitive Tender
The portion of outstanding shares that are freely available for public trading
Public Float
Smaller or larger: The _____________the public float, the more volatile the stock price is likely to be
Smaller
What are the two main types of securities used in long-term debt financing
Mortgage Bonds and Debentures
When negotiations for a new issue of securities begin between a dealer and corporate issuer, the dealer normally prepares this document which examines the financial structure of the company
Due Diligence Report
The broker named as the official advisor to a corporation on financial matters; has the right of first refusal on any new issues
Broker of Record
Dealer acts as an agent and make its best efforts to sell the securities to the public.
Best Efforts Underwriting Agreement,
What happens to the securities if they do not sell in a best efforts underwriting?
The issuer does not receive the proceeds of the sale of the securities, and the unsold securities are returned to the issuer. The issuer faces the risk of not raising the capital that it had
intended.
What is a Firm Commitment Cnderwriting Agreement also knows as?
A Bought Deal
Where an underwriter acts as a principal and commits to buy a specified number of securities at a set price, which it then resells to the public.
Firm commitment underwriting agreement
What happens to the securities in a Firm Commitment Underwriting agreement?
The underwriter pays the full proceeds to the issuer, regardless of whether it has been able to resell the securities to the public. The underwriter assumes the risk of selling the security.
Authorized but unissued stock of a company or previously issued shares that have been re-acquired by the corporation
Treasury Shares
Debt Financing or Equity Financing:
Interest payments are tax deductible for corporations.
Debt Financing
Debt Financing or Equity Financing:
No obligation to pay any portion of earnings as dividends.
Equity Financing
Debt Financing or Equity Financing:
Equity ownership is not diluted.
Equity Financing
Debt Financing or Equity Financing
Repayment of capital is not required.
Equity Financing
Debt Financing or Equity Financing:
Assets are not encumbered nor are management’s actions restricted.
Equity Financing
Debt Financing or Equity Financing:
Generally it is the lowest cost financing alternative for a company.
Debt Financing
Debt Financing or Equity Financing:
Provides a greater cushion against insolvency and can improve the company’s credit rating.
Equity Financing
The investment contract between the investor and the corporation that is offering its securities for sale
Prospectus
Designed to provide full, true, and plain disclosure regarding the material facts about the security in question
Prospectus
In-house information circular for a firm's sales representatives that highlights the salient features of the new issue, both pro and con, to solicit interest from the general public
Greensheet
The initial document released by an underwriter of a new securities issue to prospective investors
Preliminary Prospectus
What is another name for a preliminary prospectus?
Red Herring Prospectus
Gives issuers streamlined access to the capital markets in multiple jurisdictions.
Passport System
The period between the issuance of a receipt for a preliminary prospectus and receipt for a final prospectus
Waiting period
Contains the complete details of the securities being offered for sale and is accepted for filing by applicable provincial securities commissions
Final Prospectus
Once approval of the final prospectus is granted, the issue is said to be....
Blue Skyed
By when must the final prospectus be delivered to the purchaser of an issue or their agent?
By no later than midnight on the second business day after entering into an agreement of purchase and sale.
What details must a prospectus include?
Cover page disclosure
Summary
Information relating to the issuer
Information relating to the securities
Information relating to the officers and shareholders
Information relating to the parties involved (2 certificates)
Permits the underwriter to cancel an offering without penalty under certain conditions
Market Out Clauses
Contains only information not previously disclosed to regulators
Short Form Prospectus
What are 3 types of after-market stabilization?
Greenshoe option
Penalty bid
Stabilizing bid
The dealer posts a bid to purchase shares at a price not exceeding the offer price if the distribution of shares is not complete
Stabilizing bid
Selling the shares during, or shortly after, the distribution period
Flipping
Allows the dealer to issue 15% more shares than originally planned
Greenshoe option
Assume a company already provides an AIF and other continuous disclosure documents. What type of prospectus can the company use?
Short Form Prospectus
An incentive for an underwriter to act as a principal rather than an agent.
Escrow Shares
Shares held by an independent trustee in trust for its owner
Escrowed Shares
Vehicle for emerging businesses to obtain financing earlier in
their development than might otherwise be possible with a regular IPO
CPC Program - Capital Pool Company Program
A newly created company with no assets other than cash and with no established business or operations
CPC - Capital Pool Company
A transaction to purchase a business that allows a capital pool company to qualify for listing on the TSX Venture Exchange
Qualifying Transaction
Where can companies that have low levels of business activity, or who do not carry on active business at all trade>
NEX board
The process of raising start-up capital by soliciting contributions from the public at large, usually aided by online or Internet-based systems
Crowdfunding
Details the specific regulations and reporting requirements that the company must follow to keep its listing in good standing
Listing Agreement
What are the Advantages of listing a Public Company on a Major Exchange?
- Prestige and Goodwill
- Visible market value
- Market Visibility
- More Information Available
- Simplified valuation for tax purposes
What are the Disdvantages of listing a Public Company on a Major Exchange?
-Additional controls on management
- Need to keep market participants informed
- Market indifference if it performs poorly
- Additional Disclosure Requirements
- Additional Costs - listing fees
What are the three types of temporary withdrawals of trading privileges that an exchange can invoke?
- Delayed Opening (if a heavy influx of buy or sell orders materialize)
- Halt in Trading (for reporting and communication of significant news - ie merger or substancial change in dividends/earnings)
- Suspension in Trading (ie failure to comply with listing agreements until rectified)
When a listed security is cancelled
Delisted
Who can delist a security?
The exchange or by request of the company itself
Why might a security get delisted?
- called for redemption or substitutde for another security as a result of a merger
- company is without assets or goes bankrupt
- public distribution is unacceptably low
- failure to comply with the listing agreement
Under what conditions can an issuer use a short term prospectus?
The issuer must file electronically using SEDAR and must be a reporting issuer in at least one Canadian jurisdiction
How can a dealer provide after-market stabilization?
- Establishing a short position
- Penalizing dealers that sell securities shortly after issue
- Creating an open bid to buy securities at the offer price
NBB Inc. was listed on the TSX Venture Exchange. However its performance fell below the listing standards of the TSX Venture Exchange. What is the exchange that NBB. Inc. could list on?
The NEX
Farida asks her IA to sell her shares in CDD Inc., a TSX-listed stock. Her IA placed the order, but had to resort to the OTC market to fill it. What type of trading privileges withdrawal has been invoked by the TSX?
Suspension of trading
A TSX-listed company is in financial difficulty and in the middle of negotiations with the government for concessions and a possible bailout. What is the type of withdrawal of trading privileges the TSX might invoke while the company is attempting to refinance?
Halt in Trading
What is the difference between authorized shares and outstanding shares?
Authorized shares are the maximum number of shares, either common or preferred, that a corporation may issue (but is not required to issue) under the terms of its charter. Outstanding shares are the shares owned by shareholders.
IT Safety Inc. has 20 million shares authorized according to the terms of its charter. When the company first went public, it sold 10 million shares. Two years ago, it bought back 2 million shares. How many shares does the company now have outstanding and issued?
IT Safety has 8 million shares outstanding and 10 million shares issued.
What is the difference between outstanding shares and the public float?
The public float is the number of shares that are freely available for public trading. It does not include shares held by officers or directors of the company or by institutions with a controlling interest in the company.
Why does the size of the public float matter if I don’t have the money to buy 8 million shares?
If the company has a small public float, any large buy or sell orders on the stock will have a more dramatic effect on its price.
IT Safety Inc. has 20 million shares authorized based on the terms of its charter. When the company first went public, it sold 10 million shares. Two years ago, it bought back 2 million shares, so it has outstanding shares of 8 million. Directors and officers of the company own 4 million shares. Which measure of the number of shares determines the market capitalization?
The outstanding 8 million shares.
Which number of shares determine a company's market capitalization?
Number of Outstanding shares
Bonds issued by a crown corporation but guaranteed by the applicable government as to interest and principal payments.
Guaranteed Bond
Outstanding shares of a company which, while entitled to vote and receive dividends, may not be bought or sold unless special approval is obtained.
Escrowed Shares
The purchase for resale of a security issue by one or more investment dealers or underwriters.
Underwritting
What action can an exchange take to allow significant news, such as a pending merger or substantial change in dividends, to be reported and widely disseminated fairly?
Halt in Trading
A distribution method, often used by the Bank of Canada, where bids are requested from primary distributors and the higher bids are awarded the securities for distribution.
Competitive Tender
A new issue of stocks or bonds bought from the issuer by an investment dealer for resale to its clients, usually by way of a private placement or short form prospectus.
Bought Deal
A method of distribution for marketable bonds with primary distributors being allowed to request bonds at the average price of the accepted competitive tenders.
Non-competitive tender
What type of prospectus contains information by reference to material filed by the corporation in the Annual Information Form?
Short-term Prospectus
A new issue of securities offered to the public for investment for the very first time.
IPO
An activity used to stabilize the aftermarket price of a recently issued security; also referred to as a greenshoe option.
Over-Allotment Option
The period of time between the issuance of a receipt for a preliminary prospectus and receipt for a final prospectus from the securities administrators.
Waiting Period
Company allowed to seek financing by IPO before having assets or commercial operations.
CPC
The total dollar value of a company based on the current market price of its issued shares that are currently outstanding.
Market Capitalization
A group of investment dealers who together underwrite and distribute a new issue of securities or a large block of an outstanding issue.
Syndicate
The underwriting of a security and its sale to a few buyers, usually institutional, in large amounts.
Private Placement
How often are 30-year Government of Canada bonds auctioned?
Semi-Annually
What institutions are permitted to submit bids to the bank of Canada?
Institutions recognized as government securities distributors
When may the shares outstanding be less than the shares issued?
If the company has redeemed some of the shares
Why might someone opt to use a short term perspectus?
It shortens the time period by which a new issue may be offered to the public.
The lead underwriter provides after-market stabilization after the close of a new issue by using the “over-allotment option”. Why would this provision help stabilize prices if the market price was above the issue price?
The extra stock available from the over-allotment option would increase the demand for stock
In a bought deal, how is a dealer's profit calculated?
The difference between the purchase price and the distribution price
What is the name of the dealer that receives the right of first refusal on new issues?
Broker of Record
Why is it more expensive for an issuer to pay out a dollar in dividends that a dollar in interest?
Interest is a tax-deductible expense whereas dividends are paid with after-tax dollars
What statement must be printed in red ink on the front cover of a red herring prospectus?
The prospectus has been filed, is not in final form, and is subject to amendment
The shares owned by whom are not included in a company's public float?
Directors or insiders of the company
For an issuer to be eligible to use a short form prospectus, what is a condition?
The issuer's principal assets cannog be cash, cash equivalents, or another exchange listing
What is another name for outstanding shares?
Capital stock
What is true about short-sellers?
They believe shares will DECREASE in price
They may have difficulty borrowing shares
What are the characteristics of a Government of Canada marketable bond?
Non-Callable
Tradable in the secondary market
Which type of bank tends to focus on providing corporate and investment banking services?
Schedule III banks
In preparing for an upcoming election, a government cust the personal income tax rate. Rather than spending the additional funds, consumers save them. Which fiscal challenge has the government encountered
Future expectations
What is the usual time to expiration for a new rights issue?
4-6 Weeks