Chapter 1

What type of investment product has its value based on an underlying instrument? a. Bonds. b. Derivatives. c. Stocks. d. Treasury bills.

b

Where does the Ontario Securities Commission require firms to report unlisted trades in Ontario? a. QTRS b. CUB c. NEX d. PETS

b

What is the difference between debt instruments and equity instruments?

A debt instrument is an agreement whereby the issuer promises to repay a loan on a specified date (also referred to as the maturity date). In the interim, the issuer makes fixed interest payments to the investor. An equity instrument (a stock or share) allows the investor to buy an ownership stake in the company. There are two main types of stock: common shares and preferred shares. Investors with common shares participate in a proportional claim to profits, losses and any declared dividends. These investors also have voting rights at the company's annual meeting. In contrast, owners of preferred shares are entitled to a fixed dividend and have a prior claim on the company's assets, but do not participate in the company's growth and are not allowed to vote.

What is the difference between auction markets and dealer markets, and what is CUB?

Canada's stock exchanges are auction markets. In an auction market, clients' bids and offers for a stock are channelled to a single central market and compete against each other. Brokerage firms usually act as agents for their clients. The prices of all transactions are publicly visible. Dealer markets, also known as over-the-counter (OTC) or unlisted markets, do not necessarily have a central trading location or exchange where trades flow. Market makers post their bid and ask prices, but the prices at which transactions occur are less publicly visible and may differ from the posted prices. Almost all bond trading in Canada takes place in dealer markets. CUB stands for the Canadian Unlisted Board. It is the Internet-based post-trade reporting system used by dealers to report trades in unlisted securities.

How do corporations rate as sources of capital?

Corporations tend to retain their earnings and issue securities to finance their own operations and growth. Thus, corporations are not an important source of capital—they are seen as users of capital.

Do non-residents of Canada consider Canada a good place to invest? Answer.

Generally, yes. Non-residents tend to invest in Canadian industries, particularly manufacturing, petroleum and natural gas, and mining and smelting. Controls on some industries, such as the financial industry, could be eased to encourage more foreign investment.

What is the difference between the primary market and the secondary market?

The primary market is the market where a security is sold when it is first issued and sold to investors. On this market, the user of capital, such as a business or government, receives capital from investors. The secondary market is the market where subsequent trading takes place and individual investors trade among themselves.

How does capital investment affect Canada's growth?

When capital investment declines, the result is insufficient output, diminishing productivity, rising unemployment and decreasing competitiveness in domestic and international markets, all of which lead to lower living standards. Sufficient capital ensures that Canada has enough productive capacity in place to compete in the global economy.

For certain types of distributions through an exchange, which of the following documents may be accepted in lieu of a standard prospectus? a. Statement of material facts (or exchange offering prospectus). b. Free form prospectus. c. Exchange listed letter-of-intent. d. Articles of incorporation (or memorandum of association).

a

What might explain the increase in offerings of marketable bonds by the Government of Canada? a. The Government ran a budget deficit last year. b. The Government has discontinued offering Canada Savings Bonds. c. The Government wanted to pay back a large investor. d. The Government was redeeming shares from shareholders.

a

Which of the following is a difference between the auction and dealer markets? a. Prices are publicly visible in the auction market but not in the dealer market. b. The auction market deals primarily with bonds and the dealer market primarily with stocks. c. Transactions in the dealer market occur through an exchange while in the auction market through computer networks. d. Investment dealers earn commissions in the dealer market and a spread in the auction market.

a

What role does CNSX play in the Canadian marketplace? a. To act as an additional marketplace for senior securities that trade on the TSX. b. To provide an alternative market to the TSX Venture Exchange for emerging companies. c. To provide additional liquidity for trading on the TSX and TSX Venture Exchange. d. To act as the primary Government of Canada bond trading platform

b

A firm needs to raise capital but does not want to give up ownership or pledge any assets as security. Recommend the type of instrument the company should issue. a. Equity. b. Bonds. c. Debentures. d. Mutual Funds.

c

A new company needs additional financing but does not meet the requirements to be listed on an exchange. What could its owners do? a. The company could list on the CNSX. b. The company could approach the MX for special approval. c. The company could approach private equity investors. d. The company must wait until it has a better track record.

c

Retired People Fund is a large pension fund. They want to sell some of the shares in their portfolio, but think that to get the best price and lowest commissions they may need to deal directly with the potential buyer. They are required, however, to work through an existing organized trading system. Which of the following entities would best suit their needs? a. CUB b. CBID c. An ATS. d. The TSX.

c

Which of the following is a characteristic of capital? a. It is stable. b. It is highly regulated. c. It is mobile. d. It is plentiful.

c

A couple inherited $200,000. They want to invest the money but do not know what would be a good investment. Recommend a suitable investment approach. a. Direct investment. b. Invest in derivatives. c. Invest in structured products. d. Indirect investment.

d

Which exchange in Canada deals exclusively with financial futures and options? a. The Toronto Stock Exchange b. The TSX Venture Exchange c. The Winnipeg Commodity Exchange d. The Bourse de Montreal

d

Which of the following are privately-owned computerized networks that match orders for securities outside of recognized exchange facilities? a. CanPX b. QTRS c. CanDeal d. ATS

d

Which of the following represents capital? a. Material commodities like land and buildings. b. Intangible commodities like money and stocks. c. Only material commodities. d. Both material and intangible commodities of economic value.

d

Which of the following transactions takes place in the secondary market? a. Issue of federal treasury bills. b. Sale of Canada Savings Bonds. c. Issue of new debt and equity securities. d. Resale of previously issued securities

d