CSI CSC1 Canadian Securities Course Exam 1 Exam Practice Test

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

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

Study Document References:

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

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

References:

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

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.

TheCanadian Investment Regulatory Organization (CIRO)is responsible for overseeing trading and market-related activities of participants on Canadian equity marketplaces. CIRO conducts surveillance to ensure compliance with rules, regulations, and fair market practices.

Other options:

OBSI (Ombudsman for Banking Services and Investments): Handles disputes between financial institutions and their clients but does not conduct trading surveillance.

OSFI (Office of the Superintendent of Financial Institutions): Regulates and supervises federally regulated financial institutions, focusing on their solvency.

CSA (Canadian Securities Administrators): Coordinates securities regulation across Canada but does not directly monitor trading activities.

References:

Volume 1, Chapter 3:The Canadian Regulatory Environment, section on "Market Surveillance and Trading Oversight" explains CIRO's role​.

Advisors making cold calls to potential clients must comply with the Canadian Radio-television and Telecommunications Commission's (CRTC) regulations, which include subscribing to the National Do Not Call List (DNCL). This ensures they do not call individuals registered on the DNCL, protecting consumers from unwanted solicitations.

References:

Volume 1, Chapter 3:The Canadian Regulatory Environment, section on "Ethical and Legal Standards" includes compliance requirements related to cold calling, such as the DNCL regulations​.

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")​.

When individuals stop actively seeking work, they are no longer considered part of thelabour force, and this reduces theunemployment ratesince it only includes those actively seeking employment.

A (Structural unemployment)remains unchanged as this relates to mismatches in skills or geographic factors.

C (Participation rate)decreases since fewer individuals are in the labour force.

D (Labour force)decreases as individuals withdraw from it.

References:Volume 1, Chapter 4 ("Labour Market Indicators")​.

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

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

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

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

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

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Bond volatility is influenced by duration, which measures sensitivity to interest rate changes. Duration is longer for bonds with:

Longer original terms to maturity.

More time remaining until maturity.

In this case, the10-year bond with three years to maturityhas the highest duration among the options, making it the most volatile.

References:Volume 1, Chapter 7 ("Impact of Maturity on Bond Prices")​.

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

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

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

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

The primary responsibility for gatekeeping in the securities industry resides with CIRO (Canadian Investment Regulatory Organization) dealer members and their employees. This gatekeeping role includes adhering to regulations, implementing Know Your Client (KYC) and Know Your Product (KYP) rules, and ensuring compliance with ethical standards and client-focused reforms.

Dealer members and their employees must ensure that the products and services offered are suitable for their clients and that any potential conflicts of interest are managed appropriately.

Study Document References:

Volume 1, Chapter 3:The Gatekeeper Role in Securities Regulation, focusing on the responsibilities of CIRO dealer members​​.

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.

For an emerging company with limited assets and innovative goals,crowdfundingis an excellent option to maximize public exposure and raise capital. Crowdfunding involves soliciting small investments from a large number of people, typically through online platforms, making it ideal for startups or innovative ventures like the use of hot water springs for clean energy.

Other options:

Escrowing shares: Typically used to restrict the sale of shares for a certain period, not for raising capital.

Offering a greenshoe option: Applies to stabilizing stock prices in an IPO or follow-on offering, not raising initial capital.

Filing disclosure documents with SEDAR+: Necessary for public companies but does not directly raise capital or increase exposure.

References:

Volume 1, Chapter 12:Financing and Listing Securities, section on "Capital Raising Options" covers crowdfunding as a method for startups to raise funds​.

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

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

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

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

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​.

A shareholder can exercise their voting rights at an annual general meeting either in person or by designating another person to act on their behalf through a proxy. A proxy is a legal document where the shareholder appoints someone else to vote on their behalf. This is critical forshareholders who cannot attend the meeting themselves, as it ensures their voting power is not lost.

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."

An option is "in-the-money" when it has intrinsic value:

For aput option, it is in-the-money when the underlying asset’s price isbelowthe strike price, allowing the holder to sell the asset at a higher price (strike price).

Incorrect options clarify the following:

A call option is in-the-money when the underlying asset’s price isabovethe strike price.

The gain is calculated as:

Buying Price:5,000 shares purchased at $15.20 = $76,000.

Selling Price:5,000 shares sold at $15.25 = $76,250.

Profit Calculation:$76,250 - $76,000 =$1,000.

This reflects the gain from executing the market orders at the respective bid-ask prices.

Rate-reset preferred shares have dividend rates that are reset periodically, typically every five years, based on the five-year Government of Canada bond yield plus a predetermined spread. This mechanism ensures that the dividend rate adjusts to reflect prevailing market interest rates, offering investors some protection against interest rate risk.

Study Document References:

Volume 1, Chapter 8:Preferred Share Features, explaining rate-reset preferred shares and their relationship to bond yields​​.

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.

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​.

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

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

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

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

Listing on a public exchange provides companies with access to a broader pool of potential investors. This increased visibility enhances the ability to raise capital through the issuance of shares or bonds. Although there are additional costs associated with being publicly listed (such as listing fees and compliance costs), the benefits of access to new sources of funding and improved liquidity for shares often outweigh these concerns.

A. Management will benefit from the public disclosure of changes in the company: Public disclosure does not directly benefit management but is a requirement for transparency.

C. Listing the company will require restrictions on stock options issued for internal use: While stock option plans may be regulated, this is not a primary consideration for listing.

D. The valuation of securities for estate tax purposes and estate tax planning will be easier: While public listing improves transparency, estate tax considerations are not a primary driver of listing decisions.

The inflation rate is calculated using the formula:

Inflation Rate=CPIcurrent−CPIpreviousCPIprevious×100\text{Inflation Rate} = \frac{\text{CPI}_{\text{current}} - \text{CPI}_{\text{previous}}}{\text{CPI}_{\text{previous}}} \times 100Inflation Rate=CPIprevious​CPIcurrent​−CPIprevious​​×100

Substitute the given values:

Inflation Rate=125.9−123.0123.0×100=2.9123.0×100≈2.36%\text{Inflation Rate} = \frac{125.9 - 123.0}{123.0} \times 100 = \frac{2.9}{123.0} \times 100 \approx 2.36\%Inflation Rate=123.0125.9−123.0​×100=123.02.9​×100≈2.36%

B. 2.30%: This is close but results from rounding errors or miscalculation.

C. 0.98%andD. 1.02%: These values are far below the correct inflation rate calculated using the formula.

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

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

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

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

Stock index performance is best measured usingpercentage changesrather than absolute values like point changes, relative values, or share price changes. This is because percentage changes provide a normalized measure of performance, allowing for meaningful comparisons over time or between different indexes, regardless of their starting levels or the specific units in which the index is expressed.

Comparative Analysis: Percentage changes allow investors to compare the performance of indexes with vastly different base values or compositions. For example, a 100-point movement on a low-value index might be significant, while the same point movement on a high-value index might be trivial.

Normalized Returns: They normalize the performance, enabling easier tracking of relative gains or losses over time.

International Relevance: With global markets often using indexes based on different currencies or methodologies, percentage changes standardize comparisons across markets.

A. Relative value changes: This term lacks a precise definition in the context of performance measurement and is not commonly used in evaluating index performance.

B. Point changes: While point changes are informative for intraday movements or headlines, they lack context without knowing the index's value. For example, a 50-point drop could represent 0.5% or 5%, depending on the index level.

C. Share price changes: This is specific to individual securities and does not apply to indexes, which aggregate multiple stocks.

Why Percentage Changes?Incorrect Options:Reference from the CSC® Study Material:The Canadian Securities Course explains the role of indexes in tracking market performance and highlights the importance of percentage changes for measuring and interpreting their performance. This is because percentage changes provide consistency and relevance when comparing different periods or indexes with varying base values (CSC Volume 1, Chapter 8, "Stock Indexes and Averages")​.

Key Concepts Related to Index Performance:

Market indexes represent a basket of securities designed to reflect the overall performance of a specific market or sector.

Percentage changes effectively capture market sentiment and performance trends.

Common Canadian market indexes such as the S&P/TSX Composite Index and international indexes like the S&P 500 often report movements in both points and percentages, with the latter providing a more accurate representation of market dynamics​​.

This understanding is fundamental for financial professionals analyzing market trends, investment performance, and conducting portfolio management.

References:

CSC Volume 1, Chapter 8, "Equity Securities: Common and Preferred Shares – Stock Indexes and Averages"​.

CSC Volume 1, Chapter 7, "Fixed-Income Securities: Pricing and Trading – Bond Indexes" for comparative index concepts​.

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

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

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

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

To calculate the break-even price for the put options:

The strike price of the put is $55.

The cost per put option is $2.

For the investor to break even, the stock must fall below the strike price by at least the cost of the option.

Break-even price = Strike price - Cost of the option= $55 - $2 =$53

If ABT Ltd. trades at $53, the investor can sell the stock at $55 using the put and recover the $2 premium paid.

References:

Volume 1, Chapter 10:Derivatives, section on "Options Basics" explains the calculation of break-even prices for options​.

Government securities are awarded at auction using both competitive and non-competitive bidding. In a non-competitive bid, the participants (such as smaller investors or institutions) agree to accept the average yield determined by the competitive bidding process. This mechanism ensures equitable access to government securities without the need to compete directly on yield, promoting broad participation in the market​​.