CSI CSC1 - Canadian Securities Course Exam 1

Preferred shares provide investors withpriority to receive fixed dividends ahead of common shareholders. This fixed income feature makes preferred shares similar to debt instruments but with characteristics of equity. While preferred shareholders have no guaranteed dividend payment (subject to the company’s discretion and profitability), they are entitled to receive dividends before any distribution to common shareholders.

Preferred shares do not have a higher potential for capital appreciation compared to common shares, as they are typically designed for income rather than growth. Additionally, preferred shareholders have a lower claim on assets compared to debt holders.

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.

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")​.

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")​.

A stock split is used as a corporate strategy to decrease the price of individual shares by increasing the number of shares outstanding. This makes the shares more affordable for a broader range of investors, improving liquidity and potentially enhancing marketability.

For example, in a 2-for-1 stock split, shareholders receive two shares for every one share they own, and the share price is halved.

Study Document References:

Volume 1, Chapter 8:Stock Splits and Corporate Strategy, including the rationale for adjusting share prices​​.

For an emerging company with limited assets and innovative goals,crowdfundingis an excellent option to maximize public exposure and raise capital. Crowdfunding involves soliciting small investments from a large number of people, typically through online platforms, making it ideal for startups or innovative ventures like the use of hot water springs for clean energy.

Other options:

Escrowing shares: Typically used to restrict the sale of shares for a certain period, not for raising capital.

Offering a greenshoe option: Applies to stabilizing stock prices in an IPO or follow-on offering, not raising initial capital.

Filing disclosure documents with SEDAR+: Necessary for public companies but does not directly raise capital or increase exposure.

References:

Volume 1, Chapter 12:Financing and Listing Securities, section on "Capital Raising Options" covers crowdfunding as a method for startups to raise funds​.

Bond volatility is influenced by duration, which measures sensitivity to interest rate changes. Duration is longer for bonds with:

Longer original terms to maturity.

More time remaining until maturity.

In this case, the10-year bond with three years to maturityhas the highest duration among the options, making it the most volatile.

References:Volume 1, Chapter 7 ("Impact of Maturity on Bond Prices")​.

In an equity transaction,marginrefers to the loan that a dealer extends to a client to facilitate the purchase of securities. The client pays a portion of the purchase price (the margin requirement), while the dealer provides the remainder as a loan. This enables clients to leverage their investments and potentially enhance returns, albeit with increased risk.

Other options:

Amount paid by a client when using credit to buy securities: Describes the margin requirement but does not fully define margin.

Good-faith deposit to ensure future financial obligations: Refers to initial margin in derivatives trading, not equity transactions.

Interest paid by the client to borrow securities: Refers to short-selling, not buying on margin.

References:

Volume 1, Chapter 9:Equity Transactions, section on "Margin Accounts" explains the mechanics of margin trading and loans​.

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​.

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.