Financial Securtities Flashcards
Business, household, government, and banking sectors are all providing a source of income to the economy, which one of these is the primary source of savers?
Out of the business, household, government and banking sectors, households are the primary source of savers.
What is a broker, a financial intermediaries, dealer, and market intermediary?
A broker is an individual or a firm that acts as an intermediary between a buyer and a seller in financial transactions. They earn a commission or fee for their services.
Financial intermediaries are institutions or entities that act as intermediaries between savers and borrowers in the financial system.
A dealer is a person or entity that engages in the buying and selling of financial instruments, such as stocks, bonds, or derivatives, for their own account. Unlike brokers who facilitate transactions between buyers and sellers, dealers trade securities on their own behalf.
Market intermediaries are a broad term that can encompass both brokers and dealers. It refers to any entity that operates in the financial markets, facilitating the flow of funds and securities between buyers and sellers.
What is fiscal policy vs monetary policy?
In a fiscal policy a government adjusts its levels of spending in order to monitor and influence a nation’s economy. Ex: Taxes and Spending.
In a monetary policy, the actions of a central bank, Bank of Canada, currency board or other regulatory committee, that determines the size and rate of growth of the money supply which in turn, affects interest rates. Ex: Interest Rate, Currency, Open Market Operations
What are the two methods in calculating GDP?
The Income approach and the Expenditure approach are two ways to calculate GDP.
The Income approach is based on the sum of a country’s wages, rent, interest and profits.
The Expenditure approach is based on the sum of a country’s goods and services bought by the four sectors of the economy: Household Consumers (C and I), Business (C and I), Governments (G), Foreign Buyers (Exports and Imports).
GDP = C + I + G + (X-M)
What is the circular flow for an economy?
Shows that an economy’s total spending equals the income earned by its citizens. The significance of the flow is that GDP can be calculated using the information.
What are the factors of inflow and the factors of outflow?
Factors of Inflow
Revenue: Income generated from sales, services, or other business activities.
Investment Income: Returns on investments such as interest, dividends, and capital gains.
Financing: Capital raised through borrowing or equity financing.
Grants and Subsidies: Financial assistance from government or other entities.
Factors of Outflow
Operating Expenses: Day-to-day costs of running a business.
Capital Expenditures: Investments in long-term assets like equipment or property.
Debt Repayment: Payments toward loans or other debt obligations.
Dividends and Distributions: Payments to shareholders or partners.
Taxes: Payments to government authorities.
Operating Costs: Costs associated with regular business operations.
What is factor market and what is product market in a circular flow
Factor Market: The factor market is where factors of production (such as labor, land, capital, and entrepreneurship) are bought and sold. In this market, individuals sell their services to businesses, and businesses pay for the productive resources they need.
Product Market: The product market is where goods and services produced by businesses are bought and sold by households or other businesses. It is the market where the final products or services are exchanged for money. Consumers purchase goods and services, creating revenue for businesses in the product market.
What is CPI?
A Consumer Price Index is a measure of price movements, produced by Statistics Canada and obtained by comparing the retail prices of a representative “shopping basket” of goods and services at two different points in time
How is CPI calculated? (Basis point vs real GDP or GDP deflator)
It is calculated by comparing the retail prices of a representative “shopping basket” of goods and services at two different points in time
TBD
What is a leading, lagging and coincident indicator?
Leading indicators: Economic indicators that tend to change before the economy as a whole changes. They are used to predict future trends and can provide insights into the direction of the economy. Examples include stock market performance, building permits, and consumer confidence.
Lagging indicators: Economic indicators that change after the overall economy has already changed. They confirm long-term trends and are often used to assess the impact of past economic events. Examples include unemployment rates and corporate profits.
Coincident indicators: Economic indicators that change at the same time as the overall economy. They provide a real-time snapshot of the current economic conditions. Examples include GDP, industrial production, and retail sales.
What type of exchange rate can a government use to control its currency?
A government can use fixed exchange rates or floating exchange rates but in this case a fixed exchange rate would prove to be more beneficial. In a fixed exchange rate system, a government or central bank pegs its currency to another major currency or a basket of currencies. In a floating exchange rate system, the value of a currency is determined by market forces of supply and demand in the foreign exchange market.
What is the Bank of Canada?
The Bank of Canada is the central bank of Canada. It is responsible for monetary policy, issuing the Canadian dollar, promoting the stability and efficiency of the financial system, and acting as the fiscal agent for the Canadian government.
How is the Bank of Canada different from chartered banks?
The Bank of Canada is the country’s central bank, responsible for monetary policy and issuing the national currency. Chartered banks, on the other hand, are commercial banks that operate within the financial system, providing services such as deposits, loans, and other financial products to the public.
Which business cycle has the highest output and employment of the lowest output and employment?
The peak has the highest point/output on the business cycle. Spending is at its highest level and at the end of its expansion, and low unemployment and rising prices.
The trough is the lowest point/output on the business cycle. Unemployment is at its highest level and prices are falling
What is the difference between a change in quantity demand vs a change in demand?
A change in quantity demanded refers to a movement along the same demand curve in response to a change in price, while a change in demand involves a shift of the entire demand curve due to factors such as income, preferences, or the prices of related goods.
What will happen to quantity demand or supply if the economy is not in equilibrium?
If the economy is not in equilibrium, there will be a tendency for quantity demanded and quantity supplied to be different. If quantity demanded exceeds quantity supplied, there is excess demand, leading to upward pressure on prices. Conversely, if quantity supplied exceeds quantity demanded, there is excess supply, leading to downward pressure on prices.
How are these forms of business different in terms of ownership, and liabilities (sole proprietorship, partnership and corporation)?
Sole Proprietorship
Sole proprietorships are owned by a single individual. The owner has unlimited personal liability for the business debts and obligations. Personal assets are at risk.
Partnership
Partnerships involve two or more individuals who share ownership and responsibilities. In a general partnership, partners have unlimited personal liability. In a limited partnership, some partners have limited liability, while others have unlimited liability.
Corporation
Corporations are owned by shareholders, and ownership is represented by shares of stock. Shareholders generally have limited liability, meaning their personal assets are protected. The corporation itself is a separate legal entity, responsible for its debts and obligations.
What are the advantages and disadvantages of sole proprietorship, partnership (general vs limited partnership), corporation?
Sole Proprietorship
Easy to start and manage; Direct control by the owner; Tax simplicity (profits taxed as personal income). Unlimited personal liability; Limited access to capital; Business continuity challenges.
Partnership (General)
Shared decision-making and resources; Tax simplicity (profits flow through to partners); Easy to establish. Unlimited personal liability for general partners; Potential for conflicts among partners; Limited access to capital compared to corporations.
Partnership (Limited)
Limited liability for some partners; Shared decision-making and resources; Tax advantages. General partners still face unlimited liability; Complexity in structure and regulations; Limited access to capital compared to corporations.
Corporation
Limited liability for shareholders; Access to capital through stock issuance.; Perpetual existence and easier transfer of ownership. Complex legal and regulatory requirements; Double taxation (corporate and individual levels); Separation between ownership and control (agency issues).
What is the difference between direct vs indirect intermediation
Direct intermediation involves financial institutions (like banks) directly interacting with individuals and businesses, taking in deposits and providing loans or other financial services. The intermediaries directly connect savers and borrowers.
Indirect intermediation involves financial markets where individuals and businesses interact indirectly through various financial instruments. Savers invest in financial assets (such as stocks or bonds) issued by corporations or governments, and these funds are then used by the issuers for investment or operational purposes.
What is the difference between debt financing vs equity financing?
Debt financing involves borrowing money, repaid with interest, without giving up ownership. Equity financing entails selling ownership shares to investors, who become partial owners and share in profits. Debt creates a legal obligation for repayment, while equity means sharing risks and rewards. The choice depends on factors like financial structure and strategic goals.
What are securities?
Securities are financial instruments that represent ownership or debt in an entity. Examples include stocks, which signify ownership in a company, and bonds, which represent debt that the issuer must repay with interest. Securities are bought and sold in financial markets, allowing investors to trade ownership or debt instruments.
What is stock or shares?
Stocks, also known as shares or equity, represent ownership in a company. When individuals or institutional investors buy stocks, they become shareholders, owning a portion of the company.
What is the biggest stock exchange in Canada?
The Toronto Stock Exchange (TSX) is the largest stock exchange in Canada.
What is the meaning of ‘going public’?
‘Going public’ refers to the process by which a private company transitions to become a publicly traded company by offering its shares for sale to the general public on a stock exchange. This involves an initial public offering (IPO), where the company issues new shares to investors, and existing private shareholders may also sell their shares to the public.
What is the difference between bidding and asking price?
The bid price is what the buyer is willing to pay while the ask price is what the seller is willing to pay.
Name 5 types of stocks
Growth Stocks, Turnaround Stocks, Speculative Stocks, Cyclical Stocks, and Blue-Chip Stocks.
How would a stock be classified as blue chip, growth etc?
Growth Stocks: Associated with companies expected to have above-average growth in earnings and revenue.
Turnaround Stocks: Refers to stocks has the potential to rise back up again due to certain circumstances
Speculative Stocks: These stocks involve higher risk and potential reward, often associated with emerging industries or companies with uncertain prospects.
Cyclical Stocks: Associated with industries that follow economic cycles, with performance tied to the overall health of the economy.
Blue-Chip Stocks: Shares of large, well-established, and financially stable companies with a history of reliable performance.
What is a mutual fund?
A mutual fund is a type of investment fund that is a collection of investments that can include stocks, bonds, other funds or exchange-traded funds (ETFs).
What is the purpose of holding mutual funds?
Mutual funds offer diversification and professional management to individual investors by pooling money to create a diversified portfolio of securities.
How is the cost of mutual funds calculated?
The cost of a mutual fund is determined by its expense ratio, representing the percentage of the fund’s average net assets used to cover operating expenses. This ratio is expressed as an annual percentage.
What is a bond?
A bond is a borrowing arrangement through which the borrower (or seller of a bond) issues or sells an IOU document to the investor (or buyer of the bond).
What is the face value of the bond?
What the investor receives if they hold the bond to its maturity. typically $1000.
What is coupon rate, maturity date, face value?
Coupon Rate: This is the INTEREST RATE paid on the FACE/NOMINAL value of the bond
Maturity Date: The length of time until the principal amount of a bond must be repaid.
Face Value: What the investor receives if they hold the bond to its maturity.
When will it be traded at par, discount or premium?
At par is when a bond is traded at $1000, discount is when a bond is traded at less than $1000 and premium is when a bond is traded over $1000.
Why would it be traded at par, discount or premium?
Bonds are traded at par when their coupon rate equals the market interest rate, at a discount when the coupon rate is lower, and at a premium when the coupon rate is higher.
What is yield to maturity?
Yield to Maturity (YTM) is the total return anticipated on a bond if it is held until it matures.
What is a yield curve?
A yield curve is a graph that depicts the current interest rates for bonds of various bond maturities. The X-axis represents time to maturity, the Y-axis represents interest rates.
What does each yield curve show about the bond price and interest rate?
The shape of a yield curve communicates information about the relationship between bond prices and interest rates.
A normal yield curve suggests higher long-term interest rates, reflecting expectations of economic expansion and increased risk for longer-term bonds.
An inverted yield curve signals higher short-term interest rates, indicating anticipation of an economic downturn or recession.
A flat yield curve may indicate uncertainty about future economic conditions, and investors may have mixed expectations regarding interest rate movements.
What are the features of a bond (callable, convertible, retractable, and etc.)?
A callable bond allows the issuer to redeem the bond before its maturity date, a feature typically exercised when interest rates decline.
A convertible bond gives the bondholder the option to convert the bond into a predetermined number of common shares, potentially leading to capital appreciation.
A retractable bond provides the bondholder with the option to sell the bond back to the issuer before maturity at a predetermined price, serving as an exit strategy.
A zero-coupon bond pays no periodic interest but appreciates to face value over time, offering returns through capital appreciation.
A floating rate bond has variable interest rates, adjusting with changes in a reference rate, protecting investors against interest rate fluctuations.
A perpetual bond lacks a maturity date, making interest payments indefinitely, often referred to as “perpetuities.”
A fixed-rate bond maintains a consistent interest rate throughout its lifespan, ensuring investors a predictable stream of income.
How are bonds rated?
Bonds are rated by credit rating agencies based on their creditworthiness. Agencies like Moody’s, Standard & Poor’s, and Fitch assign letter grades such as AAA, AA, A, BBB, etc. These ratings assess the issuer’s ability to meet debt obligations. Factors considered include financial stability, payment history, economic conditions, and industry outlook.
What is the difference between debenture and bond?
A bond is a broad term encompassing various debt securities representing loans made by investors to issuers, including governments or corporations. A debenture, on the other hand, is a specific type of bond that is unsecured, meaning it is not backed by specific collateral or assets. All debentures are a type of bond, not all bonds are debentures, as bonds can also be secured by specific assets.
How does a 3% increase in an interest be represented by basis points?
A basis point is a unit of measure commonly used in finance to express small percentage changes. One basis point is equal to 0.01% or one-hundredth of a percentage point. Therefore, a 3% increase in interest rates would be represented by a change of 300 basis/
Types of market (primary vs secondary)?
The primary market is where new securities are issued and sold for the first time, enabling companies to raise capital by directly selling newly created stocks or bonds to investors. This often occurs through Initial Public Offerings (IPOs).
The secondary market involves the trading of existing securities among investors, where previously issued stocks, bonds, or other financial instruments are bought and sold. Trading in the secondary market typically takes place on stock exchanges, such as the TSX.
What is short selling vs long selling?
Short selling involves selling borrowed financial instruments with the intention of buying them back at a lower price, profiting from the price difference. Long selling, or going long, is the traditional approach where an investor buys and owns a financial instrument, anticipating its price will rise for future profit.
What is a margin account?
A margin account is a brokerage account that allows investors to borrow funds to purchase securities, using the existing securities in the account as collateral. This enables investors to potentially increase their buying power and leverage their investments.
When will an investor get a call from his / her brokerage in a margin account?
An investor will receive a margin call from their brokerage in a margin account if the value of securities in the account falls below a certain threshold, and additional funds are required to cover potential losses.
Which asset has the highest loan value (stock, cash, etc.)?
Stocks typically have the highest loan value in a margin account, as they serve as the primary collateral for margin borrowing.
Who should cover the dividends payment for shares that are being sold short by a broker?
The investor who has borrowed shares for a short sale is responsible for covering the dividends payment to the lender of the shares.
What is a call or put option?
A call option gives the holder the right (but not the obligation) to buy a specified quantity of an underlying asset at a predetermined price within a specified timeframe. A put option, on the other hand, gives the holder the right (but not the obligation) to sell the underlying asset at a predetermined price within a specified timeframe.
When will the options be in the money, at the money and out of the money?
An option is considered “in the money” (ITM) when the market price is favorable compared to the option’s strike price. For a call option, this means the market price is above the strike price, while for a put option, it indicates the market price is below the strike price.
An option is deemed “at the money” (ATM) when the strike price is approximately equal to the current market price.
Conversely, an option is classified as “out of the money” (OTM) when the market price is not favorable compared to the option’s strike price. For a call option, this occurs when the market price is below the strike price.
What is the strike price option?
The strike price, also known as the exercise price, is the predetermined price at which the holder of an options contract can buy (for a call option) or sell (for a put option) the underlying asset. It is the price at which the option becomes exercisable.
What does short position mean?
A short position refers to selling an asset, such as stocks or options, that the investor does not own. In the context of options, it means selling an option contract without holding the underlying asset.
Can an investor cancel a short position in a call option, what must they do in this situation?
Yes, an investor can cancel a short position in a call option by buying back the same option contract they initially sold. This process is known as “buying to close” the position.
Risk – definition; forms of risks/securities?
Risk refers to the potential for loss or deviation from an expected outcome in investment. Forms of risks include market risk, credit risk, liquidity risk, and operational risk.
What are systematic vs unsystematic risks?
Systematic risk is the risk inherent to the entire market or an entire market segment. It cannot be eliminated through diversification.
Unsystematic risk is specific to a particular company or industry and can be reduced through diversification, as it is not related to broader market movements.
How can an investor reduce investment risk
Investors can reduce risk through diversification, spreading investments across various assets. Research, staying informed, and a long-term investment contribute to risk management.
Why would the company go public?
Companies go public through an Initial Public Offering (IPO) to raise capital, increase liquidity for existing shareholders, enhance the company’s profile, and provide a means for employee stock options.
What is RRSP, RESP, TFSA and FHSA?
RRSP (Registered Retirement Savings Plan):
A tax-advantaged savings account in Canada designed for retirement savings. Contributions are tax-deductible, and investment income grows tax-deferred until withdrawal.
RESP (Registered Education Savings Plan):
A tax-advantaged savings plan in Canada specifically for education savings. It allows for tax-deferred growth, and government grants may be available to support education funding.
TFSA (Tax-Free Savings Account):
A tax-advantaged savings account in Canada that allows individuals to earn tax-free investment income. Contributions are not tax-deductible, but withdrawals are tax-free.
FHSA (First Home Savings Account):
A first home savings account (FHSA) is a registered plan which allows you, if you are a first-time home buyer, to save to buy or build a qualifying first home tax-free (up to certain limits).
What is RRSP and RESP?
RRSP (Registered Retirement Savings Plan) is a Canadian investment account designed for retirement savings, offering tax advantages.
RESP (Registered Education Savings Plan) is a Canadian investment account for education savings, providing tax benefits for post-secondary education.
Is an RRSP an indefinite plan ( can it be there as long as you wish)
An RRSP is not indefinite; there is an age limit for contributions (until the end of the year the account holder turns 71), and withdrawals are mandatory after that age.
How is an RRSP a tax shelter
RRSP contributions are tax-deductible, reducing taxable income. Investment income earned within the RRSP is tax-sheltered until withdrawal, providing potential tax advantages.
What is a defined contribution or defined benefit plan
In a defined contribution plan, the employer and/or employee contribute to an individual account, with the final pension based on contributions and investment returns.
In a defined benefit plan, the employer guarantees a specific pension amount, often based on salary and years of service, irrespective of investment performance.
What is a ratio?
The relationship between two numbers expressed in comparison to “1,” such as 5:1.
What are these financial ratios – Liquidity, profitability, leverage?
Liquidity ratios – measures the liquidity of the company. These ratios are important in measuring the ability of a company to meet both its short term and long-term obligations.
Efficiency ratios – measures the efficiency of a company in either turning their inventory, sales, etc. It also ties into the liquidity of a company.
Profitability ratios – shows the ability of a company to get returns or profits on the investment the owners made.
Who uses these ratio analysis data and who would prepare them?
Users: Investors, analysts, creditors, and management use ratio analysis data to assess a company’s financial health and performance.
Preparers: Financial analysts, accountants, and financial professionals prepare ratio analyses to provide insights into a company’s financial condition.
Analysis of Financial Statements: ratios – debt ratio, equity ratio, leverage
Debt Ratio: Compares a company’s total debt to its total assets.
Equity Ratio: Examines the proportion of equity in a company’s capital structure.
Leverage: Measures the extent to which a company uses debt to finance its operations.
List the levels of government that use the tax dollars
Federal, provincial state, and municipal (local) governments use tax dollars.
Why do citizens pay taxes?
Citizens pay taxes to fund public services, infrastructure, social programs, and other government expenditures among things they take for granted.
What do taxes pay for?
Taxes fund various government functions, including education, healthcare, defense, infrastructure, social services, and public safety.
Where do tax dollars come from?
Tax dollars primarily come from personal income tax, corporate income tax, GST, other revenues, employment insurance premiums, other taxes and duties (excl, GST).
Where do tax dollars go?
Tax dollars primarily come from operating expenses, major transfers to persons, major transfers to other levels of government, other transfer payments, public debt charges, and crown corporations.
Who creates tax laws in Canada, and who carries them out?
The department of Finance creates tax laws and the Canada Revenue Agency carries them out.
What is the role of the Canadian Parliament in terms of tax
The Canadian Parliament passes laws.
Characteristics of a good tax system.
Fairness is a key principle, emphasizing that everyone should contribute their fair share of taxes. Simplicity and Compliance are essential, as a straightforward tax system encourages compliance from taxpayers. Balance is crucial, directing tax revenues towards those in need. Stability is emphasized, stressing the federal government’s responsibility for managing the country’s economy reliably. International Competitiveness is a consideration to help Canadian businesses compete globally. Economic Growth is a goal, with the tax system aiming to foster personal and corporate wealth. Canadian Priorities are addressed by aligning the system with needs that matter most to Canadians. Transitional Implementation ensures a clear process for Canadians to follow if tax laws change, avoiding confusion. The government must consult the input of Canadians before making major changes to the tax laws.
List the tax rate for the following income? (employment income, interest income, dividend income and capital gain income)
Employment income relates to the tax bracket which ranges from 15%, 20.5%, 26%, 29% and 33%. Interest and dividend income is taxed 100%, Capital gains are taxed 50%.
What form or slips will be generated for different source of incomes (example: employment income)
For employment income, bonus, and commission you need a T4. For investment income you need a T5. For interest income you need a T3.
What form will be generated for tuition expense
The T2202 will be generated for tuition expenses
What is T1- general?
The form used to complete and submit your tax return to the Canada Revenue Agency.
What is in the total income in taxation?
Total income in taxation includes all sources of income, such as employment income, business income, rental income, investment income, and other sources, tips, RESP, unemployment income, social assistance, self-employment, etc.
What are income tax deductible items? Provide examples of this
Income deductible items reduce taxable income and can include expenses RRSP, Union due, Child care expense, Moving expense, CPP for self-employment, etc.
What is the difference between taxable income and net income?
Taxable income is the amount used to calculate income tax and includes total income minus deductions
What is federal non-refundable credit? Provide examples of this
Federal non-refundable credits reduce the amount of federal income tax owed. Examples include the Basic Personal Amount, Age Amount, and the Canada Employment Amount.
What is refundable credit? Provide examples of this.
Refundable credits can result in a refund even if the total credits exceed the taxes owed. Examples include the GST/HST, school supply credit, and the Canada Child Benefit.
Which expenses can be carried forward to next taxable year if it has not been fully deducted or used in the current year.
Certain expenses, like unused tuition and education credits, can be carried forward to future tax years if not fully utilized in the current year.
When will a taxpayer get a refund or owe money to the government should be based on total payable amount and total refundable credit amount)
A taxpayer will receive a refund if the total refundable credits exceed the total amount of tax payable. Conversely, the taxpayer will owe money if the total tax payable exceeds the total refundable credits.
Calculation of tax implication on investment income such as interest, dividend and capital gain.
a. Apply the correct tax bracket
Determine Total Income: Combine all sources of income, including employment income, interest income, dividend income, and capital gains.
Identify the Tax Bracket: Determine the applicable tax bracket based on the total income. Different portions of income are taxed at different rates.
Calculation of tax implication on investment income such as interest, dividend and capital gain.
b. Calculate the tax payable amount
Apply Marginal Tax Rates: Apply the marginal tax rates for each type of income (interest, dividends, and capital gains) to calculate the tax payable on each.
Consider Tax Credits and Deductions: Factor in any eligible tax credits and deductions, such as those for charitable donations, medical expenses, or business expenses.
Calculation of tax implication on investment income such as interest, dividend and capital gain.
c. Calculate the after tax income for these investments
Calculate After-Tax Income: Subtract the total tax payable amount from the total income to determine the after-tax income.
Calculation of tax implication on investment income such as interest, dividend and capital gain.
d. Calculate the ROR for these before and after tax
Calculate ROR Before Tax: Determine the rate of return before tax by dividing the net income before tax by the initial investment.
Calculate ROR After Tax: Determine the rate of return after tax by dividing the after-tax income by the initial investment.
