CSI CSC1 Canadian Securities Course Exam 1 Exam Practice Test

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

References:

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

Acallable bondgives the issuer the right to redeem the bond before its maturity date at a specified price, which often includes acall premium. The call premium is the additional amount over the bond’s face value that the issuer pays to compensate the bondholder for the early redemption. Callable bonds are advantageous for issuers when interest rates drop, allowing them to refinance the debt at a lower cost.

Definitions of Other Bond Types:

Acronyms (A):Not a bond type. This option is irrelevant.

Extendible (C):These bonds allow the bondholder to extend the maturity date, not the issuer to redeem early.

Convertible (D):These bonds allow bondholders to convert them into a specified number of common shares of the issuing company.

Retractable (E):These allow the bondholder, not the issuer, to demand early redemption before the maturity date, usually at par.

Why Callable is Correct:

A callable bond explicitly provides the issuer with the right to redeem the bond early, typically at a premium.

This feature is included in the bond’s terms and conditions and is typically accompanied by specific call dates and premiums.

References:

Canadian Securities Course (CSC), Volume 1, Chapter 6: Fixed-Income Securities – Features and Types. Explanation of callable bonds and their associated premiums​.

Discussion on the advantages and risks of callable bonds for issuers and investors​.

At the end of the five-year term, if the issuer does not redeem the rate-reset preferred shares, the shareholder can choose to:

Continue holding the shares at the reset fixed rate.

Convert them intofloating-rate preferred shareswith rates tied to a benchmark (e.g., prime or LIBOR).

This conversion offers flexibility to the shareholder based on market conditions.

A. Exchange for a specified number of common shares: Rate-reset preferred shares do not have this feature.

B. Exchange for a fixed-rate preferred share: The fixed-rate component is reset, not exchanged.

C. Exchange for an unsecured bond: This is not a feature of rate-reset preferred shares.

As a senior executive at ABC Inc. and a board member of XYZ Company, Diana is considered an insider for both firms. Insiders are required to report any trading activity in securities of companies where they hold positions of influence. This ensures transparency and helps prevent insider trading.

Option A:Press releases are not required for insider reporting.

Option B:Incorrect; obligations apply to both companies.

Option D:Incorrect; Diana’s role at XYZ Company also imposes reporting requirements.

Aforward contractis a derivative instrument whose value is derived from the value of an underlying asset, such as commodities, currencies, or financial instruments. It is a customized agreement between two parties to buy or sell an asset at a future date at a specified price.

A. Real estate investment trust: A REIT is an equity instrument tied to real estate assets, not a derivative.

C. Preferred share: A preferred share is an equity security with fixed dividends, not a derivative.

D. Inflation-linked bond: These are fixed-income securities linked to inflation rates but are not considered derivatives.

When submitting a trade ticket for a short sale, an investment advisor mustmark the sell-order ticket as a short sale. This ensures compliance with regulatory requirements and informs the broker and exchange that the sale involves borrowed shares. Marking the order appropriately helps maintain transparency and enables monitoring for potential market manipulation.

A. Verify the client can borrow the shares: The responsibility for ensuring share availability lies with the broker, not the advisor.

C. Obtain minimum margin amount from client: This is done separately as part of the account setup and transaction process, not when submitting the trade ticket.

D. Mark it as a margin order: Short sales involve margin, but the ticket must specifically indicate "short sale" rather than just "margin."

Theexchangethat lists and trades the futures contract sets theminimum initial margin rate. This margin is required as collateral to ensure performance under the contract. The exchange determines this rate based on the volatility and risk of the underlying asset, and it is subject to adjustment depending on market conditions.

Other options:

Investment dealer: Acts as a facilitator but does not set the margin rates.

Buyer/Seller: Must meet the margin requirements but do not set them.

References:

Volume 1, Chapter 10:Derivatives, section on "Futures Contracts" describes the role of exchanges in setting margin requirements​.

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

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

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

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

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

Other options:

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

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

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

References:

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

Self-directed brokers are the most cost-effective option for investing in derivatives. They provide a platform for investors to execute trades independently without the additional costs associated with advisory services offered by full-service brokers. Investors are charged lower transaction fees, making this option ideal for cost-conscious individuals who are comfortable making their own investment decisions.

B. A full-service broker: Full-service brokers charge higher fees because they provide additional advisory and management services.

C. An integrated firm: Integrated firms offer both retail and institutional services, which generally come with higher fees compared to self-directed platforms.

D. An investment boutique: Boutique firms typically specialize in niche markets and may have higher service costs, which are not ideal for cost-effective derivatives trading.

In a limited partnership, the liability of limited partners is strictly limited to the amount of their investment in the partnership. They do not participate in the day-to-day management or operational decision-making of the partnership. This characteristic ensures that their personal assets are protected beyond their contribution to the partnership.

If limited partners were to engage in the management of the partnership, they could potentially lose their limited liability protection and be treated as general partners, exposing their personal assets to liability.

This concept is foundational in business structures like limited partnerships, allowing investors to contribute capital without risking their personal wealth beyond the agreed investment.

Study Document References:

Volume 1, Section on Corporations and Financial Structures:This section discusses different forms of business organizations, including partnerships, and highlights the limited liability of investors in structures like limited partnerships​​.

Improving a municipality's credit rating involves adopting sustainable financial strategies that enhance fiscal stability and resilience. Option D, which focuses on attracting diversified investments, is the most effective approach to achieve this goal in the long term.

A. Increase cash flow through higher business taxes to improve debt repayment abilityRaising business taxes may improve immediate cash flow, but it risks driving businesses away, which can harm the municipality's economic base over time. An over-reliance on higher taxation can discourage investment and stunt growth, making it an unsustainable strategy​.

B. Negotiate a deal with the provincial government to back up its securitiesWhile support from a provincial government can stabilize credit in the short term, it does not address the underlying economic fundamentals. Long-term creditworthiness depends on the municipality's ability to generate and manage its own revenues, reducing dependency on external guarantees​​.

C. Build a strong, exclusive industry with little competition in the regionSpecializing in a single industry introduces concentration risk. If the industry declines or faces competition, the municipality’s financial base would weaken significantly. Economic diversification is essential to mitigate such risks​​.

D. Attract new investments from various industries to increase tax revenueEncouraging investments across multiple industries diversifies the economic base and creates a stable revenue stream. This approach spreads risk, improves fiscal resilience, and aligns with long-term credit rating improvement strategies as outlined in the CSC course materials. By fostering a diverse and dynamic economy, the municipality enhances its ability to service debt and sustain financial health​​.

Explanation of Options:

Economic Diversification

CSC Volume 1 emphasizes the importance of economic diversification for reducing fiscal vulnerabilities and promoting sustainable growth (Chapter 4, "Economic Indicators"). Diversification spreads risk and enhances resilience, making it a key driver for improving credit ratings​.

Municipal Creditworthiness

Discussions in CSC Volume 2 highlight how a strong, diversified economy underpins municipal credit ratings by providing a consistent and reliable revenue base (Chapter 6, "Municipal Securities")​.

Tax Revenue and Economic Growth

Fiscal strategies discussed in Volume 1 (Chapter 5, "Fiscal Policy") stress the importance of balancing revenue generation with economic incentives to foster investment and growth​.

Supporting References from CSC Materials

The FTSE Canada Universe Bond Index is acapitalization-weighted index, meaning that the weights of its components are based on their market value. It includes bonds from various issuers (both government and corporate) with terms to maturity of at least one year.

A. US dollar bonds from Canadian issuers are included: Only bonds denominated in Canadian dollars are included.

B. Only bonds with a term to maturity of 30 days or more are eligible for inclusion: Bonds must have a minimum term to maturity of one year, not 30 days.

D. Only government bonds are included: The index includes both government and corporate bonds.

A stock split is used as a corporate strategy to decrease the price of individual shares by increasing the number of shares outstanding. This makes the shares more affordable for a broader range of investors, improving liquidity and potentially enhancing marketability.

For example, in a 2-for-1 stock split, shareholders receive two shares for every one share they own, and the share price is halved.

Study Document References:

Volume 1, Chapter 8:Stock Splits and Corporate Strategy, including the rationale for adjusting share prices​​.

High interest rates increase the cost of borrowing for businesses and consumers. For businesses, higher borrowing costs mean that financing for capital projects, expansions, or operational improvements becomes more expensive. This often leads to a reduction in investment activity, ultimately slowing economic growth. For consumers, higher rates reduce disposable income and spending, indirectly affecting businesses by reducing demand for goods and services​​.

In an equity transaction,marginrefers to the loan that a dealer extends to a client to facilitate the purchase of securities. The client pays a portion of the purchase price (the margin requirement), while the dealer provides the remainder as a loan. This enables clients to leverage their investments and potentially enhance returns, albeit with increased risk.

Other options:

Amount paid by a client when using credit to buy securities: Describes the margin requirement but does not fully define margin.

Good-faith deposit to ensure future financial obligations: Refers to initial margin in derivatives trading, not equity transactions.

Interest paid by the client to borrow securities: Refers to short-selling, not buying on margin.

References:

Volume 1, Chapter 9:Equity Transactions, section on "Margin Accounts" explains the mechanics of margin trading and loans​.

The Bank of Canada uses anoperating band of 50 basis pointsto manage the overnight rate. The top of the band is theBank Rate, and the bottom is the rate the Bank pays on settlement balances. The overnight rate typically operates within this band.

A. 25 basis points: This is too narrow to accommodate monetary operations.

B. 75 basis points: This is wider than the standard operating band.

D. 100 basis points: This is incorrect; the operating band is 50 basis points.

Preferred shares provide investors withpriority to receive fixed dividends ahead of common shareholders. This fixed income feature makes preferred shares similar to debt instruments but with characteristics of equity. While preferred shareholders have no guaranteed dividend payment (subject to the company’s discretion and profitability), they are entitled to receive dividends before any distribution to common shareholders.

Preferred shares do not have a higher potential for capital appreciation compared to common shares, as they are typically designed for income rather than growth. Additionally, preferred shareholders have a lower claim on assets compared to debt holders.

Sinking fundsrequire the issuer to redeem a specified portion of the bond issue at regular intervals. This ensures systematic debt reduction and is mandated regardless of market conditions.

Purchase funds, however, allow the issuer to buy back bonds only if they are available in the market at or below a stipulated price, making redemption conditional on market conditions.

B. Sinking funds can redeem bonds only if they trade below a stipulated price: This applies to purchase funds, not sinking funds.

C. Sinking funds involve the issuer determining when bonds are redeemed while purchase funds involve the investor determining when the bonds are redeemed: Investors have no role in determining bond redemption under either method.

D. Sinking funds can redeem the bonds any time while purchase funds follow a prearranged schedule: Sinking funds follow a schedule, and purchase funds rely on market conditions.

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

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

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

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

When a country’s central government is at risk of defaulting on its debt, lenders perceive higher risks and demand higher interest rates as compensation. This results in:

Anincrease in interest ratesfor borrowing by all entities in the country.

OptionsA and Bare incorrect because exchange rates usually decline (currency devalues) when default risk rises.

D. Decrease in interest ratesis the opposite of what happens in such scenarios.

References:Volume 1, Chapter 4 ("Sovereign Risk and Interest Rates")​.

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

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

Study Document References:

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

The Bank of Canada estimates that the effects of changes in monetary policy take approximately18 monthsto fully work through the entire economy. This lag exists because monetary policy impacts various sectors, such as consumer spending, business investment, and trade, at different speeds.

B. 6 months: This is too short a timeframe for the full effects of monetary policy to materialize.

C. 3 months: Immediate impacts may be seen in financial markets, but the broader economic effects require longer.

D. 36 months: This is far longer than the typical lag for monetary policy effects.

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

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

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

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

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

Retained earningsrepresent the portion of a company’s annual profit that is retained and not paid out as dividends. It is used to reinvest in the business or pay down debt.

B. Comprehensive incomeincludes all changes in equity except those from owner contributions or distributions.

C. Share capitalrefers to funds raised by issuing shares.

D. Gross profitis revenue minus the cost of goods sold, not the portion retained.

References:Volume 1, Chapter 11 ("Corporations and Their Financial Statements")​.

The settlement date for Government of Canada bonds follows theT+1 rule, meaning settlement occursone business day after the transaction date. This rule ensures efficient clearing and settlement processes in the government bond market.

B. Same day the transaction takes place: While this applies to some instruments in rare cases (e.g., cash transactions), it is not the standard for Government of Canada bonds.

C. Two business days after the transaction (T+2): This applies to equity trades and corporate bonds but not government bonds.

D. Three business days after the transaction (T+3): This is an outdated settlement timeline.

To reduce a national deficit, governments canincrease taxationto generate more revenue. This measure, combined with controlled spending, helps reduce the shortfall between revenues and expenditures.

B. Increase government spending: This would increase the deficit further unless matched by revenue increases.

C. Decrease taxation: This would reduce revenue and worsen the deficit.

D. Increase interest rates: This impacts monetary policy and borrowing costs but does not directly reduce a fiscal deficit.

When a dealer member fills a client’s order for an unlisted security from its own inventory, the dealer is acting as aprincipal.

A (Alternative trading system)refers to electronic platforms for trading securities.

B (Clearing agent)involves post-trade settlement activities.

C (Over-the-counter agent)is incorrect since the dealer is transacting directly.

References:Volume 1, Chapter 9 ("Principal and Agency Transactions")​.

The approximate price change of a bond due to a change in interest rates can be estimated using the formula:

Price Change (%)=−Duration×ΔInterest Rate\text{Price Change (\%)} = - \text{Duration} \times \Delta \text{Interest Rate}Price Change (%)=−Duration×ΔInterest Rate

Given:

Duration= 5

Current Price= $103

Change in Interest Rate(Δ\DeltaΔ) = 2% or 0.02

Price Change (%)=−5×0.02=−0.10 (−10%)\text{Price Change (\%)} = -5 \times 0.02 = -0.10 \, (-10\%)Price Change (%)=−5×0.02=−0.10(−10%)

The new price is calculated as:

New Price=Current Price×(1+Price Change)=103×(1−0.10)=103×0.90=97.85\text{New Price} = \text{Current Price} \times (1 + \text{Price Change}) = 103 \times (1 - 0.10) = 103 \times 0.90 = 97.85New Price=Current Price×(1+Price Change)=103×(1−0.10)=103×0.90=97.85

A. $108.15andB. $113.30: These represent price increases, which are incorrect for rising interest rates.

D. $92.70: This reflects a greater-than-actual price drop, which is inconsistent with the duration-based calculation.