Chapter 2 - Capital Markets & The Financial Industry

Question 0

2 ways capital can be used

Answer 0

Directly through the purchase of material things ie land, buildings.

Indirectly through the purchase of representational things such as stocks and bonds or deposits in a savings account.

Question 1

What is capital?

Answer 1

Capital is wealth

Question 2

Characteristics of capital.

Answer 2

It is mobile, sensitive and scarce. It’s glow is guided by:
Political environment; economic trends; fiscal policy; monetary policy; opportunities for investment with acceptable risk and satisfactory return and characteristics of the labour force.

Question 3

What is the only source of capital?

Answer 3

Savings

Question 4

Are corporations important providers of permanent funds to others in capital markets?

Answer 4

No, they tend to retIn their savings in the corporation rather than invest in other companies stocks.

Question 5

What is the liquidity objective.

Answer 5

At nearly all times there are buyers at some price point for the securities. This is for investors who need money on short notice.

Question 6

Why is tax minimization as an investment objective

Answer 6

The tax treatment of any investment varies depending on whether the returns are categorized as interest, dividends of capital gains.

Question 7

Normally the investment in any one security should be limited to what % of the total portfolio?

Answer 7

10%

Question 8

A balanced portfolio consists of?

Answer 8

Securities from cash equivalents, fixed income securities (bonds and preferred shares) and common shares.

Question 9

In addition to balancing a portfolio how else can it be diversified?

Answer 9

Invest in different industries, geographical areas, maturity dates

Question 10

Name the 3 groups of users of capital

Answer 10

Individuals, corporation and government

Question 11

Name 3 instruments the federal government uses to finance it’s debt.

Answer 11

Treasury Bills (T-bills)
Long and short term bonds
Canada savings bonds.

Question 12

How many stock markets are in Canada and what type are they?

Answer 12

Canada has 5 stock exchanges and they are auction markets.

Question 13

Almost all bond trading in Canada takes place in what type of market?

Answer 13

Dealer/over the counter

Question 14

What Canadian stock exchanges accept debt security listings?

Answer 14

Alberta and Toronto

Question 15

A liquid market is characterized by

Answer 15

Frequent sales

Narrow price spread between bid and offering prices

Small price fluctuations from sale to sale.

Question 16

When a stock exchange is founded how are memberships obtained?

Answer 16

They are sold to different individuals

Question 17

On the ASE membership involves acquisition of one or more stock exchange seats. What does this entitle the owner to?

Answer 17

It entitles the owner, upon election, to exchange as a member, trade listed securities on the exchange, participate in the corporate affairs of the exchange.

Question 18

Can you sell a stock exchange seat?

Answer 18

Yes, it is a valuable asset which may be sold subject to conditions in the exchanges bylaws.

Question 19

How does one become a member of an existing stock exchange?

Answer 19

In addition to obtaining the necessary approvals an applicant broker must purchase a seat from an existing member who is willing to sell.

Question 20

What are the conditions of stock exchange membership?

Answer 20

At least 40% of the firm must be involved in the securities business.

Applicant must have sufficient capital to carry on business

Key personnel must have completed the required course of study.

Member firms may be publicly owned.

Question 21

Who is responsible for administration and policy setting of the exchange.

Answer 21

The administration and policy setting of the exchange is the responsibility of each exchanges governing body

Question 22

The exchanges governing body is made up of…

Answer 22

Governors - senior exchange officials.

Public Governors - elected from outside the brokerage community.

President.

Question 23

What is the makeup of the governing body of the Alberta Stock Exchange?

Answer 23

1 president

3 public governors

11 governors.

Question 24

Who assists the exchanges governing body?

Answer 24

Exchange committees are formed from exchange membership to perform supervisory functions and delegated responsibilities.

Question 25

Describe the position and responsibilities of the president of the exchange

Answer 25

A full time position that is filled by appointment of the governing body.

Responsible directs all aspects of the exchanges day to day operations. Takes initiative to promote the exchange and does PR.