CSI CSC1 Canadian Securities Course Exam 1 Exam Practice Test

Investment advisors (IAs) are required to record the names and addresses of all individuals who have requested and received a preliminary prospectus. This ensures compliance with securities regulations and provides a record for follow-ups and potential disclosures related to the offering.

A. The IA must ensure a proxy is mailed: Proxy voting is related to shareholder meetings, not the prospectus distribution.

B. The IA must provide a greensheet: A greensheet is used internally by investment firms, not distributed to clients.

C. The IA must make a tombstone advertisement: Tombstone advertisements are created by the issuer, not the IA.

Discount brokers fall under the category ofretail firms. Retail firms cater to individual investors and often provide services such as executing trades at reduced commission rates, but they typically do not offer financial advice or portfolio management. Discount brokers provide online platforms for self-directed investors.

A. Institutional firms: These firms serve large-scale investors such as pension funds or mutual funds, not individual investors.

C. Integrated firms: These firms operate in both retail and institutional markets, but discount brokers are specifically associated with retail services.

D. Boutique firms: These firms specialize in niche markets or services, such as wealth management or specific industry securities, rather than general retail brokerage.

The normal shape of a yield curve is anupward slope, indicating that longer-term bonds offer higher yields than shorter-term bonds. This reflects the additional risk and time value of money associated with longer maturities.

A. Downward slope: This could describe a yield curve during unusual circumstances, such as a period of market uncertainty or deflation.

B. Inverted: An inverted yield curve, where shorter-term yields exceed longer-term yields, is a rare occurrence and often signals economic recession.

D. Humped: A humped curve is rare and occurs when intermediate-term yields exceed both short-term and long-term yields.

When foreign interest rates rise, capital may flow out of Canada as investors seek higher returns abroad. To counter this, the Bank of Canada may increase short-term interest rates to make Canadian assets more attractive and maintain the value of the Canadian dollar. This helps stabilize the exchange rate and reduces the risk of imported inflation.

Such actions demonstrate the central bank's role in managing monetary policy to preserve economic stability and maintain currency confidence.

Study Document References:

Volume 1, Chapter 5:Monetary Policy and the Role of the Bank of Canada​​.

The FTSE Canada Universe Bond Index represents a comprehensive cross-section of investment-grade government and corporate bonds denominated in Canadian dollars. It includes bonds with a term to maturity of one year or more and excludes high-yield (non-investment-grade) bonds.

A. It measures the total price return on bonds including realized and unrealized gains: The index does not account for realized gains; it tracks price movements and interest income.

C. It includes Canadian investment-grade bonds with a term to maturity of one year or less: Bonds in this index must have a term to maturity of at least one year, not less.

D. It is an equal-weighted bond index with each bond representing the same weight within the index: The FTSE Canada Universe Bond Index is capitalization-weighted, not equal-weighted.

Advisors making cold calls to potential clients must comply with the Canadian Radio-television and Telecommunications Commission's (CRTC) regulations, which include subscribing to the National Do Not Call List (DNCL). This ensures they do not call individuals registered on the DNCL, protecting consumers from unwanted solicitations.

References:

Volume 1, Chapter 3:The Canadian Regulatory Environment, section on "Ethical and Legal Standards" includes compliance requirements related to cold calling, such as the DNCL regulations​.

Treasury bills (T-bills) are short-term fixed-income securities issued by the Government of Canada with maturities of one year or less, including terms as short as six months or less. They do not pay interest in the conventional sense. Instead, they are sold at a discount to their facevalue, and investors receive the full face value upon maturity. The difference between the purchase price and the face value represents the investor's earnings.

A. Guaranteed bonds: These are long-term securities that pay periodic interest (coupons) and do not fit the short-term, non-interest-paying description of T-bills.

B. Commercial paper: Issued by corporations, not governments, and used to finance short-term liabilities.

D. Term deposits: These are bank products, not government securities, and typically pay interest over their term.

One advantage of public listing is the goodwill generated among shareholders. Public listing enhances the company's visibility, credibility, and reputation, which can attract investors, customers, and business partners. This goodwill often facilitates access to capital and strengthens the company's market presence.

Study Document References:

Volume 1, Chapter 12:Advantages of Public Listing, outlining benefits such as goodwill and increased capital access​​.

When the public distribution of a security drops to an unacceptably low level, the exchange may consider delisting the security. This action ensures that the securities listed on the exchange meet minimum requirements to maintain market integrity and liquidity. Delisting is a permanent measure and typically occurs after other corrective actions fail, such as halting or suspending trading.

TheKnow Your Client (KYC) rulerequires registrants to gather detailed personal and financial information from clients before providing investment advice or making recommendations. This ensures that investment recommendations align with the client’s financial goals, risk tolerance, and circumstances.

This obligation is critical for ensuring suitability in investment products and maintaining regulatory compliance.

Suitability rule (A)refers to matching investments to a client's needs but comes after gathering KYC information.

Gatekeeper obligations (C)focus on preventing illegal activities like money laundering.

Fiduciary duty (D)applies to acting in the best interest of the client but is broader in scope.

References:Volume 1, Chapter 3 ("Know Your Client Rule")​.

Aninterest rate forward agreement (FRA)is anover-the-counter (OTC)derivative contract. Unlike exchange-traded derivatives, OTC contracts are not centrally cleared, meaning there is no intermediary to guarantee performance. This increases counterparty (default) risk, making FRAs inherently riskier than exchange-traded contracts.

A. Individual investor buying shares on an exchange during the ex-rights period: This is a standard transaction involving equity securities, not derivatives, and carries no default risk.

C. Exchange-traded equity option contract between an individual investor and a dealer: Exchange-traded derivatives are backed by a clearinghouse, which mitigates default risk.

D. Individual investor entering a futures contract with an institutional investor: Futures contracts are also exchange-traded and centrally cleared, reducing default risk.

Theintrinsic valueof a warrant is calculated as the difference between the current market price of the common share and the exercise price of the warrant, provided the market price of the share is higher than the exercise price.

Intrinsic Value=Market Price of Common Share−Exercise Price of Warrant\text{Intrinsic Value} = \text{Market Price of Common Share} - \text{Exercise Price of Warrant}Intrinsic Value=Market Price of Common Share−Exercise Price of Warrant

Using the values provided:

Market Price of 1 KJR Inc. Common Share= $32

Exercise Price of Warrants= $30

Intrinsic Value=32−30=2\text{Intrinsic Value} = 32 - 30 = 2Intrinsic Value=32−30=2

Since the market price of the share is greater than the exercise price, the intrinsic value is$2.

Explanation of Incorrect Options:

Option A ($0):This would be correct if the exercise price were greater than or equal to the market price of the common share.

Option B ($5):This incorrectly includes the market price of the warrant ($5), which is irrelevant to intrinsic value calculation.

Option D ($3):This is not derived from the given data and calculations.

References:

Canadian Securities Course (CSC), Volume 1, Chapter 8: Equity Securities – Common and Preferred Shares. Discussion on warrants, including intrinsic value calculations​.

To calculate the first coupon payment for Brice's real return bond, we follow these steps:

Step 1: Determine the adjusted principal.

The bond is a real return bond, meaning its principal is adjusted for inflation based on the Consumer Price Index (CPI). The initial principal is$10,000, and CPI increases by0.8%over six months.

Step 2: Calculate the semi-annual coupon payment.

The coupon rate is5% annual, paid semi-annually, so each coupon payment is based on half the annual rate:

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Conclusion:

The first coupon payment Brice will receive is$252.

References:

Canadian Securities Course (CSC), Volume 1, Chapter 6: Fixed-Income Securities – Features and Types. Discussion on real return bonds and their adjustment mechanism for inflation​.

Canadian Securities Course (CSC), Volume 1, Chapter 7: Fixed-Income Securities – Pricing and Trading. Calculation methodologies for bond payments​.

Bond indexes are widely used in the securities industry to constructbond index funds, which aim to replicate the performance of the bond market or a specific segment of it.

A (Provide liquidity)refers to market-making activities, not bond indexes.

B (Direct purchase)is uncommon, as bond indexes are benchmarks rather than individual investments.

D (Assess credit risk)is achieved through credit rating agencies, not bond indexes.

References:Volume 1, Chapter 7 ("Bond Indexes")​.

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When individuals stop actively seeking work, they are no longer considered part of thelabour force, and this reduces theunemployment ratesince it only includes those actively seeking employment.

A (Structural unemployment)remains unchanged as this relates to mismatches in skills or geographic factors.

C (Participation rate)decreases since fewer individuals are in the labour force.

D (Labour force)decreases as individuals withdraw from it.

References:Volume 1, Chapter 4 ("Labour Market Indicators")​.

A key characteristic ofprovincial savings bondsis that they can only be purchased by residents of the issuing province. This restriction differentiates them from other provincial bonds, which may be available to investors nationwide or internationally.

Other options:

Backed by provincial assets pledged as security: All provincial bonds are backed by the credit of the issuing government, not specifically by pledged assets.

Purchased at any time of the year: Provincial savings bonds are available only during specific sales campaigns.

Do not have redemption rules: Savings bonds often have specific redemption rules, unlike this statement.

References:

Volume 1, Chapter 6:Fixed-Income Securities, section on "Provincial and Municipal Bonds" explains the restrictions and features of provincial savings bonds​.

The inflation rate is calculated using the formula:

Inflation Rate=CPIcurrent−CPIpreviousCPIprevious×100\text{Inflation Rate} = \frac{\text{CPI}_{\text{current}} - \text{CPI}_{\text{previous}}}{\text{CPI}_{\text{previous}}} \times 100Inflation Rate=CPIprevious​CPIcurrent​−CPIprevious​​×100

Substitute the given values:

Inflation Rate=125.9−123.0123.0×100=2.9123.0×100≈2.36%\text{Inflation Rate} = \frac{125.9 - 123.0}{123.0} \times 100 = \frac{2.9}{123.0} \times 100 \approx 2.36\%Inflation Rate=123.0125.9−123.0​×100=123.02.9​×100≈2.36%

B. 2.30%: This is close but results from rounding errors or miscalculation.

C. 0.98%andD. 1.02%: These values are far below the correct inflation rate calculated using the formula.

Self-directed brokers are the most cost-effective option for investing in derivatives. They provide a platform for investors to execute trades independently without the additional costs associated with advisory services offered by full-service brokers. Investors are charged lower transaction fees, making this option ideal for cost-conscious individuals who are comfortable making their own investment decisions.

B. A full-service broker: Full-service brokers charge higher fees because they provide additional advisory and management services.

C. An integrated firm: Integrated firms offer both retail and institutional services, which generally come with higher fees compared to self-directed platforms.

D. An investment boutique: Boutique firms typically specialize in niche markets and may have higher service costs, which are not ideal for cost-effective derivatives trading.

The investor wrote 5 put options ("GHI December 45") at a strike price of $45 with 100 shares per contract (5 × 100 = 500 shares). The cash-secured amount ensures the writer can cover the purchase if exercised:

Obligation Amount:500 shares × $45 = $22,500.

Premium Received:$1.20 × 500 = $600.

Net Cash Requirement:$22,500 - $600 =$21,900.

This ensures the investor has enough funds to purchase the shares if the put options are exercised.

Theexchangethat lists and trades the futures contract sets theminimum initial margin rate. This margin is required as collateral to ensure performance under the contract. The exchange determines this rate based on the volatility and risk of the underlying asset, and it is subject to adjustment depending on market conditions.

Other options:

Investment dealer: Acts as a facilitator but does not set the margin rates.

Buyer/Seller: Must meet the margin requirements but do not set them.

References:

Volume 1, Chapter 10:Derivatives, section on "Futures Contracts" describes the role of exchanges in setting margin requirements​.

At the end of the five-year term, if the issuer does not redeem the rate-reset preferred shares, the shareholder can choose to:

Continue holding the shares at the reset fixed rate.

Convert them intofloating-rate preferred shareswith rates tied to a benchmark (e.g., prime or LIBOR).

This conversion offers flexibility to the shareholder based on market conditions.

A. Exchange for a specified number of common shares: Rate-reset preferred shares do not have this feature.

B. Exchange for a fixed-rate preferred share: The fixed-rate component is reset, not exchanged.

C. Exchange for an unsecured bond: This is not a feature of rate-reset preferred shares.

Frictional unemployment arises from normal labor market activities, such as people transitioning between jobs, entering or re-entering the workforce, or temporarily being unemployed after completing education. This type of unemployment is always present, even in a healthy economy, and reflects short-term gaps in employment rather than structural or economic downturns.

Natural unemployment (Option A):Refers to the combination of frictional and structural unemployment present in an efficient economy.

Structural unemployment (Option B):Caused by mismatches between skills workers possess and those needed by employers, often due to technological advances.

Cyclical unemployment (Option C):Linked to economic recessions or downturns where demand for labor decreases.

Futures contracts are standardized agreements to buy or sell an asset at a predetermined price on a future date. They are unique because they can be traded on regulated exchanges, such as the Chicago Mercantile Exchange (CME), or over-the-counter (OTC), where counterparties negotiate terms directly.

This dual trading mechanism ensures flexibility and accessibility for market participants, differentiating futures from other derivatives like forwards, which are typically OTC-only.

Study Document References:

Volume 1, Chapter 10:Derivatives and Features of Futures, including how they are traded​​.

Retained earningsrepresent the portion of a company’s annual profit that is retained and not paid out as dividends. It is used to reinvest in the business or pay down debt.

B. Comprehensive incomeincludes all changes in equity except those from owner contributions or distributions.

C. Share capitalrefers to funds raised by issuing shares.

D. Gross profitis revenue minus the cost of goods sold, not the portion retained.

References:Volume 1, Chapter 11 ("Corporations and Their Financial Statements")​.

The approximate price change of a bond due to a change in interest rates can be estimated using the formula:

Price Change (%)=−Duration×ΔInterest Rate\text{Price Change (\%)} = - \text{Duration} \times \Delta \text{Interest Rate}Price Change (%)=−Duration×ΔInterest Rate

Given:

Duration= 5

Current Price= $103

Change in Interest Rate(Δ\DeltaΔ) = 2% or 0.02

Price Change (%)=−5×0.02=−0.10 (−10%)\text{Price Change (\%)} = -5 \times 0.02 = -0.10 \, (-10\%)Price Change (%)=−5×0.02=−0.10(−10%)

The new price is calculated as:

New Price=Current Price×(1+Price Change)=103×(1−0.10)=103×0.90=97.85\text{New Price} = \text{Current Price} \times (1 + \text{Price Change}) = 103 \times (1 - 0.10) = 103 \times 0.90 = 97.85New Price=Current Price×(1+Price Change)=103×(1−0.10)=103×0.90=97.85

A. $108.15andB. $113.30: These represent price increases, which are incorrect for rising interest rates.

D. $92.70: This reflects a greater-than-actual price drop, which is inconsistent with the duration-based calculation.

The settlement date for Government of Canada bonds follows theT+1 rule, meaning settlement occursone business day after the transaction date. This rule ensures efficient clearing and settlement processes in the government bond market.

B. Same day the transaction takes place: While this applies to some instruments in rare cases (e.g., cash transactions), it is not the standard for Government of Canada bonds.

C. Two business days after the transaction (T+2): This applies to equity trades and corporate bonds but not government bonds.

D. Three business days after the transaction (T+3): This is an outdated settlement timeline.

Along-term bond with a low couponwill maximize capital gains when interest rates fall. Here’s why:

Long-term bondsare more sensitive to interest rate changes due to their longer duration, which amplifies the price movement.

Low coupon bondsare more affected by changes in interest rates compared to high coupon bonds because more of their value comes from the principal repayment rather than periodic interest payments.

Other options:

Short-term bonds: Have lower duration and less sensitivity to interest rate changes, so they do not maximize capital gains.

High coupon bonds: Are less sensitive to interest rate changes because of their higher periodic cash flows.

References:

Volume 1, Chapter 7:Fixed-Income Securities: Pricing and Trading, section on "Impact of Maturity and Coupon on Bond Prices" explains the relationship between interest rate changes, bond duration, and price sensitivity​.

A shareholder can exercise their voting rights at an annual general meeting either in person or by designating another person to act on their behalf through a proxy. A proxy is a legal document where the shareholder appoints someone else to vote on their behalf. This is critical forshareholders who cannot attend the meeting themselves, as it ensures their voting power is not lost.

TheEnergy sectoris one of the highest-weighted sectors in theS&P/TSX Composite Indexbased on market capitalization. This reflects Canada's resource-rich economy, where energy companies, including oil, gas, and related services, make up a significant portion of the market.

Other options:

Health care: A relatively small portion of the index.

Utilities: Have a smaller weight compared to energy.

Information technology: While growing, it has not surpassed energy in weight within the Canadian market.

References:

Volume 1, Chapter 8:Equity Securities, section on "Canadian Market Indexes" outlines the composition and sectoral weightings of the S&P/TSX Composite Index​.

Ashort form prospectusis a streamlined disclosure document that companies can use to raise funds more efficiently under specific conditions. The issuer must meet specific eligibility criteria outlined in Canadian securities regulations to qualify for filing a short form prospectus.

Key Conditions for Filing a Short Form Prospectus:

Listed Securities Requirement: The company must have its securities listed and actively traded on an eligible stock exchange (e.g., TSX or another recognized exchange). This requirement ensures that the company already complies with reporting obligations and has a history of providing transparent information to investors.

Continuous Disclosure History: The company must be a reporting issuer in one or more Canadian jurisdictions for at least 12 months, providing continuous disclosure (e.g., financial statements, material changes).

No Principal Asset Restriction: The company must not primarily rely on cash or cash equivalents as its principal asset, as this does not provide a sufficient operational track record.

Domestic Reporting Requirement: The company must not rely solely on foreign jurisdiction reporting; it must fulfill Canadian reporting requirements.

Review of Options:

Option A:Incorrect. While the prospectus may be used for financing purposes, it is not a condition specific to the short form prospectus.

Option B:Correct. A company must have securities listed and actively traded on an eligible exchange to use the short form prospectus​​.

Option C:Incorrect. Companies whose principal assets are cash or cash equivalents are typically not eligible for a short form prospectus.

Option D:Incorrect. The company must not exclusively be a reporting issuer in foreign jurisdictions; it must comply with Canadian reporting requirements.

References:

Canadian Securities Course (CSC), Volume 1, Chapter 12: Financing and Listing Securities. Discussion on eligibility for short form prospectus filings and reporting issuer status​.

National Instrument 44-101: Short Form Prospectus Distributions.