Chapter 1 - Introduction

Question 0

Difference between bonds and debentures (debt instruments)

Answer 0

Bonds are secured by a specific asset of the issuer. Debentures are secured by general credit of the issuer.

Question 1

4 types of financial instruments

Answer 1

Debt (bonds, mortgages, debentures, treasury bills and commercial paper)

Equity (stocks or shares)

Mutual Funds

Derivatives

Question 2

2 types of shares or stocks

Answer 2

Common shares and preferred shares.

Question 3

What is the difference between common and preferred shares?

Answer 3

Common shareholders have a vote and a claim to profit when the business is profitable.

Preferred shares do not have a vote and they are generally entitled to a fixed dividend. They have a prior claim on the assets of the company before common shareholders.

Question 4

What is a mutual fund

Answer 4

The fund raises capital by selling shares or units and this capital is them invested. The unit holders receive a portion of the money made by the fund.

Question 5

What is a derivative security

Answer 5

A financial security, such as an option, or future, whose value is derived in part from the value and characteristics of another security, the underlying security ie an option

Question 6

What is a call option

Answer 6

A derivative security that gives the holder the right to purchase the underlying interest.

Question 7

What is a put option

Answer 7

A derivative security that gives the holder the right to sell the underlying security.

Question 8

What are the 2 types of securities markets?

Answer 8

Primary and secondary.

Question 9

What is a primary market?

Answer 9

The market where a security trades upon its primary distribution.

Question 10

What is a secondary market?

Answer 10

The market where the trading of previously issued securities takes place.

In a secondary market trades take place between investors. Issuers receive no money

Question 11

2 types of secondary markets

Answer 11

Dealer markets (over the counter markets) and auction markets (clients bid and offers are channeled to a central market)

Question 12

In the capital markets What are intermediaries?

Answer 12

Organizations that assist in the transfer of capital from savers to users it brokers, banks.

In the securities sector of the capital market they are investment dealers

Question 13

What is an underwriting?

Answer 13

Underwriting generally involves the purchase from the government or company of stocks or bonds. A dealer or group of dealers buys the issue and attempts to resell it to investors for a profit. The dealer earns a profit because of the effort in selling it. He also asses risk if the price falls.

Question 14

2 functions of investment dealers?

Answer 14

1. To help transfer capital from the savers to the users through underwriting and distributing securities on the primary market.
2. To maintain a secondary market where previously issued or outstanding securities can be traded.

Question 15

What is a stock exchange?

Answer 15

A not for profit organization owned and operated by member brokerage firms.

Question 16

What is the difference between a dealer acting as a principal or as a broker or agent?

Answer 16

When acting as a principal the dealer owns the stock in his inventory and he profits by the difference in his purchase price and the sale price.

When acting as a broker the the dealer never owned the stock, he is brokering the deal between the seller and the purchaser. Profit is made by commission from the person for whom he acted.

Question 17

What is a market maker?

Answer 17

In some exchanges certain traders are allowed to buy from their own firms accounts to enhance market liquidity. These people are called market makers.

Question 18

Requirements to sell securities to the public (investment advisor)

Answer 18

Be of legal age
Pass the CSC
Pass the conduct and practices handbook exam
Be registered

Question 19

What is the Canadian securities Institute

Answer 19

The industries educational body

Question 20

What is the Canadian Investor Protection Fund

Answer 20

The body that insures clients from losses up to a set amount

Question 21

What does NASDAQ stand got

Answer 21

National Association of Securities Dealers Automated Quotations

Question 22

Name 2 broad categories of international bond issues.

Answer 22

Foreign Bonds and Euro Bonds

Question 23

Describe Foreign bonds

Answer 23

Bonds offered and denominated in a currency of a country other than that of the borrower, with members of the underwriting community resident in the country where the issue is floated.

Ie a Canadian company where the issue is underwritten and sold in the USA

Question 24

Describe a Eurobond

Answer 24

A Eurobond issue may be denominated in one of several currencies (US dollars, Canadian dollars, Swiss or French franks, Japanese Yen or Sterling).

It will be underwritten by a multinational dealer-banking syndicate,

It will be offered simultaneously in several European and other financial centers to financial institutions who will distribute it to their clients.

It is usually sold in a country other than where it is denominated.

Question 25

Name 3 primary and 2 secondary goals of investors

Answer 25

Primary:
Safety of Principal
Income
Growth of Capital

Secondary:
Marketability or Liquidity
Tax minimization

Question 26

What is the trade off for a highly safe investment.

Answer 26

Lower rate of income return and lower opportunity for capital growth.

Question 27

What are the safe investments in Canada?

Answer 27

Federal, Provincial and municipal bonds held to maturity.

Selected high grade corporate bonds.

Shorter term bonds

Government of Canada treasury bills are the safest (virtually risk free).

Question 28

What does an investor have to do to maximize income.

Answer 28

Usually give up some safety because he will have to purchase corporate bonds or preferred shares with lower investment ratings.

In general as yield goes down safety hoes up BUT it should not be assumed that as yield goes down safety goes up.

Question 29

What is a stock that could be described as a growth of capital stock?

Answer 29

It is going to be characterized by low yield but it holds considerable promise for growth.

Typically a common stock in an expanding company in an innovative market.