Canadian Securities Exam Fast Track Study Guide Primary markets involve the sale of new securities to investors,

while secondary markets involve trading of previously issued securities among investors Bearer Bonds differ from Registered Bonds in that Bearer Bonds are considered to be owned by the actual holder of the bond, while Registered Bonds have the name of the owner on the face of the bonds The Canadian Investor Protection Fund CIPF covers the personal losses of an investors position up to a maximum of $1,000,000 The Minority Interest item on a balance sheet arises from the Consolidation Method of accounting Housing Starts is an example of a Leading Business Cycle Indicator The Duputy Minister of Finance sits on the Board of Directors at the Bank of Canada, but has no voting rights During periods of rising prices, the FIFO method of inventory valuation will lead to the highest profits GDP will exceed GNP if the value of all goods and services produced by the contrys nationals is less than the value of all goods produced within a contry within a year During a period of declining interest rates, an inveswtor would prefer to hold a longer term, non-callable strip bond The settlement date for Gvernment of Canada T-bills are the same day The maximum loan amount by investment dealers to clients for the purchase of shares with a market price of $1.50 per share is 20% If a prospectus contains a misrepresentation, security purchasers have the right of recission When a security offering requires an offering memorandum rather than a full prospectus, it is generally known as a Private Offering Auction Markets are characterized as a market where buyers and sellers of securities converge to trade with one another

You decide to purchase 10 board lots of the common shares of a company on a margin. The share is not eligible for a special margin, and is presently trading at $2. How much cash do you deposit with you broker? = $1,000 = 50% margin = 0.50 x $2.00 x 100qty x 10qty

If the price dropped to $1.80, how much will you be required to deposit into your margin account? = $280 = max loan 40% x $1,800 = $720 = deposit $1,000 - $720

A friend decides to short sell 1,000 shares of a security not eligible for special margin and is trading at $5. What amount must she deposit into a margin account? = $2,500 = deposit 0.50 x $5.00 x 1000qty

What profit/loss does she relize if she closes her position at $4? = Profit of $1,000 = Profit ($5 - $4) x 1,000qty

Medium-sided banks are owned wholly by either residents or non-residents Major uses for investment capital: Investment in land Investment in equipment Investment in financial assets Major Capital Account components: Investment Internal reserves transactions Portfolio investment Grey Market is a colloquialism used to describe the unofficial unlisted market for newly issued not as of yet unlisted securities The main difference between a warrant and a right is that: A warrant is generally long term and is usually attached to another issue as a sweetner, while a right is generally short term and is issued to enable new funds to be raised immediately Unemployment that rises when the economy softens and drops when the econmy strenthens is known as cyclical unemployment Stock Index Options are primarily European Style The Liquidity Preference Theory states that investors prefer shorter-term bonds to longerterm bonds because they exhibit less interest rate risk Limit Orders are executed only if a specific price or better can be obtained Stop-Buy Orders are used to limit losses on Short Positions

A firm presently has $100 million (face value) in non-callable bonds outstanding. They pay annual coupons at a rate of 7% and the bonds mature 6 years from today. What is the present market price of the bonds if the Yield to Maturity on identical bonds is 8%? = $95.38million = $7,000,000 x {1-[1/1.08] x 5.5) / 0.08} + 100,000,000 x (1/[1.08] x 5.5) When would the price of the bond be lower? If the bond was callable What would be an investors one year pretax percentage return on these bonds if they were purchased at a 5% premium over face value and resold one year later, when the yield was 7%? = 1.9% = Price at year, 1 $00 = Since yield, (coupon rate/return) = (100 105 + 7) / 105

What is the accrued interest on the bonds 120 days after the last coupon date? = $2.301million = $7,000,000 x (120/365)

Bond Quote: XYZ Co. 6.00%

1 July 07/12

100.50

101.20

5.94

It is an extendible bond It pays coupons on July 1st and January 1st every year If you sold this bond on Feb9th, you would receive $1,011.58 from the buyer Purchase Price = 1,005 + (40/365 x $60)

A convertible preferred share is presently selling for $40 and is convertible into 2 common shares that are presently selling at $8.50 each. The annual dividends are $2.00 for the preferred and $0.45 for the common. What is the conversion premium percentage? = 8.11% = (40 8.5 x 2) / (18.5 x 2) What is the dividend yield on the preferred shares? = 5.0% = 2/40 What is the payback for these convertibles? = 3.16years Yield = (0.45/18.5) = 2.43 Payback = 8.1 / (5 2.43)

You decide to purchase common shares of two companies on margin. Share X is eligible for a special margin and is trading at $12 Share Y is trading at $1.80 What is your total margin requirement if you purchase 1,000 shares of X and 1,000 shares of Y? = $4,680 = (1,000 x 12 x 0.30) + (1,000 x 1.8 x 0.60) If the price of X increases to $12.75 and the price of Y falls to $1.40, how much (if any) are you required to deposit in your margin account? = $195 ( $720 deposit reqd - $525 excess) Stock X Max Loan = 0.70 x 12,750 = $8,925 Stock Y Max Loan = 0 Repay previous loan = 1,800 1,080 = $720 deposit required

Previous Loan = 12,000 3,600 = $8,400

Excess = 8,925 8,400 = $525 excess

What is the yield on a 190day Government of Canada Tbill that is priced at $99.45? = 1.06% = ([100 99.45] / 99.45) x (365/190)

What is the yield to maturity on a 10% bond that pays out coupons semiannually and has 10years to maturity if the bond is selling at par? = 10.0% Bond sells at face value so YTM = coupon rate

A Eurobond: An Austrailian company issues bonds denominated in Canadian Dollars, in the Belgium Market The Primary differnce between a futures contract and a forwards contract: forwards contracts are not standardized Non Competitive Bids, must be in multiples of $5,000, with a minimum bidder of $25,000 per bid, and a maximum of $3,000,000 per bidder The main difference between an AON buy order and an any part buy order is; an any part order is an order that the client will acept all stock in odd, broken, or board lots up to the full amount of the order. While an AON order is one in which the total number of shares as specified in the order must be purchased before the client will accept the fill When is it appropriate to use the Consolidated Accounting Method? When the parent owns more than 50% of the voting shares of a subsiary The major functions of the Bank of Canada: Act as the Governments fiscal agent, Conduct monetary policy, Act for the Government in the issuance and removal of bank notes Primary Investment Objectives: safety, income and growth of capital Difficulties and hazzards of Short Selling: There can be difficulties borrowing the required quantity of the security sold short to cover the short sale There are difficulties in obtaining up-to-date information on total short sales on a security The short seller is responsible for maintaining adequate margin in the short account Advantages of Incorporation: Limited liability of shareholders Continuity of existence Ease of ownership transfer A Dealer Market consists of a network of dealers who trade with each other over the phone or over a computer network. While an Auction Market is where all transactions converge to one location The difference between Direct Obligation and Guaranteed Obligation debt securities; direct obligation bonds are issued by the government, while guaranteed obligation bonds are issued in the name of a Crown Corporation but backed by the provincial government

Advantages to issuing preferred shares: Does not effect debt-equity ratio adversely Greater financing flexibility

The main difference between Collateral Trust Bonds and Equipment Trust Certificates; Equipment Trust Certificates are secured by rolling stock, while Collateral Trust Bonds are secured by a pledge of financial assets Protective provision that places restrictions on additional borrowing by a corporation: After Acquired Clause, Closed End Mortgage, Open End Mortgage with restrictive provisions

Factors influencing interest rates: Inflation Demand and Supply of Capital Default Risk Central Bank Operations and Credibility Exchange Rate If a nation is running a Fiscal Deficit, it is spending more on goods and services than it is raising in tax revenues CanDeal, member of the IDA, joint venture of Canadas six largest banks, and operated by the TSX Five phases of the business cycle in order: Expansion Peak Recession Trough Recovery Higher interest rates affect the economy by: They raise the cost of borrowing for investment purposes They discourage consumers from spending capital on items such as durable goods They reduce the available household income because of the higher proportion of income needed to service debt Straight Line Depreciation produces a lower depreciation charge for the first year in which an asset is purchased The underwriting expensesa associated with a debt issue are usually lower than those associated with common equity issues

A company has issued warrents which are presently outstanding. One warrant is required to purchase one common share. The common share price is $20, the warrant price is $3, and the excise price is $22. The Intrinsic Value of one warrant is: = Zero IV = Max (20-22,0) The Time Value of one warrant is: = $3.00 TV = 3 - 0 The leverage potential of one warrant is: = $6.67 = 20 / 3

Monika decides to short sell 500 shares of Air North Inc. (eligible for a reduded margin), currently trading at $22/share How much money will Monika have to put in her margin account? = $3,300 = 0.30 x (500 x $22) If shares incresed to $25, would Monika receive a margin call? And if so, how much? = Yes, for $1,950 additional deposit of funds = 25 x 500 x 1.30 = 16,250 = 16,250 3,300 11,000

What is the yield to maturity on a 6% bond that pays out coupons semiannually and has 20 years to maturity if the bond is selling at 120% of par? 4.55% Yield = (6 + [100 120] / 20) ( [100 + 120] / 2) = ( 6 1 ) / 110 = 4.55%

Governments issue debt for the following reasons: To fund deficits To develop income-producing services To fund infrastructure projects Retail Sales is an example of a coincident business cycle indicator The Bank Rate is set at the upper limit of the Banks operating band for the overnight rate The Market Segmentation Theory suggests that the yield curve represents the supply and demand for bonds of various terms, which are primarily influenced by the bigger players in each sector A director of a parent company would be considered a corporate insider Prohibited activities by investment advisors: Telephoning residences Bucketing Maintaining confidential numbered accounts OSFI, established to provide a simple regulatory body for all federally regulated financial institutions Fixed income properties: Prices are inversly related to interest rates Prices exhibit greater interest rate risk the longer the term to maturity According to the Phillips Curve: when inflation increases at a faster rate, unemployment decreases in the short run

Monetarist Theory says that the economy will automatically move to the natural rate of unemployment on its own A company declares a dividend that is payable on March 19th to holders of record on February 1. In order to be entitled to receive this dividend, you must buy shares prior to: January 30th During the process of issuing shares a Greensheet is prepared, which is an information circular for in-house use only Issuers under the SFPD System: Issuers are not in default of any requirements under the relevant securities legislation Issuers have a large public float A Variable Dividend Preferred Share would suit an aggressive and sophisticated investment portfolio If the Yield to Maturity is less than The Coupon Rate, a bond must be selling at a premium The Settlement Date for GoC Bonds is: the third clearing day after the transaction All else being equal, a retractable bond will always sell for more than an otherwise similar callable bond Intagible Assets: Goodwill Trademarks The Miscellanious Assets category on the balance sheet would include all of the following: Cash surrender value of life insurance Amounts due from directors Advances to subsidiaries Company A owns 25% of Company B. If Company B earns $100million and pays dividends of 12.5million to Company A, what entry will Company A make on their earnings statement? $25million in equity income Purchase Funds are more common than Sinking Fund Provisions for preferred shares issues

A capital asset is purchased for 80,000, amoritizing on a declining balance method at a rate of 10%. The amortitization expense in year 3: = 6,480 = (80,000 [80,000 x 0.10] [72,000 x 0.10] x 0.10

If that asset has a useful life of 7years and an expected salvage value of $10,000, what is the charge in year 3 if the straight line method is used? = 10,000 = (80,000 10,000) / 7 = 10,000

A company has 800,000 shares outstanding before it undergoes a for 4 consolidation. After consolidation, the number of shares outstanding will be: = 200,000 = 800,000 / 4

If the real rate of interest is 6% and the rate of inflation is 2%, what is the nominal rate of interest? = 8% (Nominal = Real + Inflation)

A company presently has 500,000 shares outstanding which are trading at $50 per share. The shares are presently trading cum rights and five days are required to purchase one share at the subscription price of $45 What is the Intrinsic Value before the ex rights date? = $0.83 = (50 -45) / (5 + 1)

What is the theoretical intrinsic value of one right two days after the ex rights date if the shares are trading at $49.50? = $0.90 = (49.5 45) / 5 How much money has the firm raised if the rights offering is fully subscribed? = $4,500,000 = (500,000 / 5) x 45

What will be the market price of 6% preferred shares with a par value of $20 and a required rate of return of 8%? = $15 Price = (0.06 x 20) / 0.08

An investor obtains the following market prices for a call option on ABC Companys common shares that are currently trading at $8.00 per share. The excise price on the call option is $10 and the call premium is $1.50 What is the time value premium for ABCs call option? = $1.50 Time Value = Premium 0 What is the net profit? (ignoring transaction costs) for an investor who purchases one contract if they hold the option to the exiration date at which time the share price is $12? = $50.00 Profit = (12-10) x 100 - 150