Canadian Securities and Financial Markets: An Overview, Exams of Accounting

Download Canadian Securities and Financial Markets: An Overview and more Exams Accounting in PDF only on Docsity! 2024 AFM 121 MidTerm Exam New Latest Exam Best Studying Material Updated Recent Version with Questions and Answers Which of the following is an example of a capital market that is efficient and liquid? ------ ---- Correct Answer --------- Many buyers and sellers A bond covenant is intended to do the following: ---------- Correct Answer --------- restrict the behaviour of the borrower What is CSA --------- Correct Answer --------- Canadian Securities Association Formed by all 13 securities commissions to provide a national umbrella group to co- ordinate provincial activities What is IIROC and what does it do? --------- Correct Answer --------- Oversees all investment dealer and trading activity in the Canadian debt and equity market Formulates standards and policies for Canadian debt and equity markets What is capital adequacy? --------- Correct Answer --------- It is the amount of money that firms must set aside when holding bank deposits / making loans / raising capital What is MFDA? --------- Correct Answer --------- Mutual Funds Dealers Association Their goal is to establish a fund similar to Canadian Investor Protection Fund (CIPF) to protect mutual fund investors up to $100k per account What is CIPF? --------- Correct Answer --------- Canadian Investor Protection Fund Role is to anticipate and solve financial difficulties at member firms before bankruptcy occurs Provide coverage of up to $1 million related to losses from security holdings and cash balances - if a member firm goes bankrupt What is arbitration? --------- Correct Answer --------- It is less involved, less consuming, less expensive When do IIROC and other SROs offer investors compensation through arbitration? ------ --- Correct Answer --------- Provided: Attempts were made to resolve dispute with investment dealer Claim is less than $100k Dispute occurred after a defined cut-off date Why not go through courts for disputes? --------- Correct Answer --------- Expensive Time consuming Investors at unfair advantage (info and access to legal services vs. member firms) Three basic methods are used to protect investors? --------- Correct Answer --------- Registration of securities dealer and advisors Disclosure of material facts Enforcement of the laws and policies What is a portable risk to a bank borrowing short and lending long? ---------- Correct Answer --------- long-term interest rates decreases while short-term interest rates increases What is one area of banking regulation that likely reduced the negative impact of the 2007 - 2009 financial crises in Canada? ---------- Correct Answer --------- Rules relating to capital adequacy Today, you invested $100 in a GIC that pays an EAR of 3%. What is the value of investment in 14 years? ---------- Correct Answer --------- $151.26 Which of the following is not a way that a stock exchange makes money? ---------- Correct Answer --------- Fees from companies making capital structure changes What is the rate of return on a one-year, zero coupon bond that is purchases for $92, and has a face value of $100? ---------- Correct Answer --------- 8.70% Interlisted securities refer to securities that: ---------- Correct Answer --------- Trade on more than stock exchange The % coupon rate is typically less than % YTM on a bond ---------- Correct Answer ------ --- False Which of the following is not a reasonable rationale for which a company would sell shares to the public? ---------- Correct Answer --------- Pay dividends IIROC is an example of? ---------- Correct Answer --------- An SRO Institutional Investors (pension funds and mutual funds) Foreign investors (can include foreign retail, institutional and government investors) Who uses capital? --------- Correct Answer --------- Companies and businesses (earn money through internally through existing operations and reinvest the money) (raise money by issuing stocks/bonds) Government (t bills, longer term debt) (spend on all forms of government spending that aren't covered by tax and other revenues) What are the different kinds of financial instruments? --------- Correct Answer --------- Debt Equity Investment Funds Derivatives Private equity What makes a market efficient? --------- Correct Answer --------- Fast Cheap Liquid What are primary markets? --------- Correct Answer --------- Securities are sold by issuers for the first time Issuer receives money from this sale What are secondary markets? --------- Correct Answer --------- Where securities previously issued are bought and sold Funds do not go to issuer How are regulations set for financial intermediaries? --------- Correct Answer --------- Regulations are meant to be structured such that market efficiency is a by-product of this self interest What are auction markets? --------- Correct Answer --------- Where all transaction converge in one location (TSX, TSX Venture Exchange) How does a stock exchange make money? --------- Correct Answer --------- Transaction fees Initial listing fees What is the latest trend in stock exchanges? --------- Correct Answer --------- Physical locations to trading systems Speed and cost efficiency are crucial What are dealer markets? --------- Correct Answer --------- Over the counter markets Trade directly with one another over the phone Mostly used for bonds What are ATS? --------- Correct Answer --------- Computerized systems that execute orders outside traditional exchanges Buyers / sellers often contract each other directly Costs / fees are lower Is securities regulations a provincial responsibility? --------- Correct Answer --------- Yes What are SROs and what do they do? --------- Correct Answer --------- Self Regulatory Organizations Owned by its members that regulate and police themselves IIROC, TSX, TSX Venture Exchange What does CDS stand for and do? --------- Correct Answer --------- Canadian Depository for Securities Clears or settles trades (owned by TMX) What is CSI? --------- Correct Answer --------- Canadian Securities Institute Offers courses required for licensing by regulators Different types of investment dealers? --------- Correct Answer --------- Big 6 banks Small boutiques Different departments within an investment dealer? --------- Correct Answer --------- Underwriting Trading Investment Banking Brokerage What are the two different types of brokers? --------- Correct Answer --------- Full-service (offers high touch service and advice) Discount brokers (limited servces, no advice) What is leverage? --------- Correct Answer --------- Short term borrowing finances long term investments Are there any risks with borrowing short and lending long? --------- Correct Answer ------- -- People can default Short term rates can be high and long term rates can be low What is Eurobonds or eurocurrencies? --------- Correct Answer --------- Euro denotes a security trading outside of its home jurisdiction (US dollar circulating outside USA) How do investment dealers act as principals in the primary markets? --------- Correct Answer --------- Investment dealer agrees to a price with the issuer and buys all of the shares / bonds (bought deal) Then dealer sell shares or bonds to investors How do investment dealers act as agents in the primary market? --------- Correct Answer --------- Investment dealer markets the shares or bonds to investors on a best efforts basis; the investment dealer does not purchase Charge commission How do investment dealers act as principals in the secondary markets? --------- Correct Answer --------- Invest their own capital and earna spread between purchase and sale prices How do investment dealers act as agents in the secondary markets? --------- Correct Answer --------- Invest their clients capital and earn a commission on executed trades What happens after a trade is executed? --------- Correct Answer --------- Cash from the buyer's brokerage account is transferred to the brokerage account of the seller Share ownership is transferred What are the three types of banks? --------- Correct Answer --------- Schedule 1: Domestic banks Schedule 2: Foreign subsidiaries Schedule 3: Branches of foreign banks What do capital flows depend on? --------- Correct Answer ---------- - Political environment (stable government or banana republic?) - Economic trends - Fiscal policy (government spending and taxation) - Monetary policy (government by central banks) - Investment opportunities - Labour force (highly educated/laws governing rights of labour force) Sources of capital --------- Correct Answer ---------- 1. Retail investors (like you and me!) 2. Institutional investors - Pension funds (CPP, OTPP) - Mutual funds (Trimark, AGF) 3. Foreign investors - Can include foreign retail, institutional, and government investors - Investments are made directly in Canadian firms or through stocks/bonds for Canadian firms listed on foreign exchanges Users of capital --------- Correct Answer ---------- 1. Companies/businesses - Raise $ by issuing stocks/bonds - Invest in new products/markets/machinery 2. Governments (federal, provincial, municipal) - Treasury bills (<1 year), longer term debt, Canada Savings Bonds (federal/provincial) - Spent on healthcare, education, infrastructure Financial instruments --------- Correct Answer ---------- Mechanisms by which wealth/capital is transferred 1. Debt - Funds are borrowed and paid back at maturity date - Between borrowing and maturity date, interest payments are made 2. Equity - Typically represented by stocks/shares in a company (ownership) - May have voting/dividend rights 3. Investment funds - Buys and sells stocks/bonds - typically through a mutual fund 4. Derivatives - These products derive their value from another asset (stock, bond, commodity, currency) - Often used for hedging (mitigate the effect of a strong C$ or higher oil prices) 5. Private Equity - Invest in both debt and equity - Investments typically made directly in companies (not through purchases of stock or bonds) - Funds are provided by pension funds, endowments, wealthy individuals Financial markets --------- Correct Answer ---------- - Financial instruments only work well if accompanied by efficient markets (fast, cheap, liquid) 1. Primary markets - Securities (shares/bonds) are sold for the first time - May be an IPO or subsequent equity offering 2. Secondary markets - Where securities previously issued are bought are sold between shareholders Financial intermediaries --------- Correct Answer ---------- People/companies that improve market efficiency by facilitating the flow of capital from buyers to sellers (Banks, insurance companies, pension funds, investment dealers, PE/VC capital firms) - Financial intermediaries may work in their self interest - Regulations are meant to be structured such that market efficiency is a by-product of this self-interest - The financial crises exposed areas where firms were working in their self-interest and also working against market efficiency Auction Markets --------- Correct Answer ---------- A market where all traders meet at one place to buy or sell an asset How do stock exchanges make money? --------- Correct Answer ---------- - Transaction fees (if you buy/sell a stock, you pay a fee) - Initial listing fees (if a company conducts an IPO, they pay a fee) - Fees from companies making capital structure changes - Sale of historic data As a result, stock exchanges have transferred from physical locations to trading systems, and speed and cost efficiency are crucial. Stock exchanges have been joining together (through M&A) Describe the Canadian Regulatory Structure --------- Correct Answer ---------- - Securities regulation is a provincial responsibility (ex. Ontario Securities Commission (OSC), BC Securities Commission (BCSC) - SROs provide oversight and enforcement Other SRO Players --------- Correct Answer ---------- 1. Canadian Depository for Securities (CDS) - Clears or settles trades - Owned by the TMX 2. Canadian Investor Protector Fund (CIPF) - Insures brokerage account contents (not losses!) 3. Canadian Securities Institute (CSI) - Offers courses required for licensing by regulators, owned by Moody's Canadian Securities Industry Today --------- Correct Answer ---------- According to the IIROC 2014-2015 Annual Report... - 187 Investment dealers - 28264 registered persons - 3% of firms have revenue over $1 billion - 8% of firms have revenue $100m-1b - Rest of firms are smaller, with over half generating revenue below $5mil Investment Dealers --------- Correct Answer ---------- - Small number of national-scope investment dealers (Mostly Big Banks, a few independent) - Many small "boutique" investment dealers (Often specialize in specific sectors or products) - Multiple depts. within an investment dealer: underwriting, trading, investment banking, brokerage Brokers --------- Correct Answer ---------- Can be full-service or discount - Full service offer "high-touch" service/advice [high fees] - Discount offer limited services, no advice [low fees] Leverage --------- Correct Answer ---------- The Financial Services industry is highly leveraged - Use short-term borrowing to finance long-term investments - Borrow money every 90 days to finance a 20-year mortgage Technological Changes --------- Correct Answer ---------- Evolution in technology has increased interconnectedness of markets: - Interested securities - Multiple listings for securities (Ex. Apple's shares trade on many different stock exchanges) Globalization --------- Correct Answer ---------- - Markets are no longer restricted to local suppliers and issuers of capital - Canadian investors can buy US listed shares; Canadian banks lend to US borrowers Regulatory Changes --------- Correct Answer ---------- - Post crisis financial regulation is increasing the compliance responsibility for financial firms (Anti-Money Laundering [AML], Foreign Account Tax Compliance Act [FATCA]) - Regulation creates additional barriers Primary Markets / New Issues (aka Debt or Equity Underwriting/Financing) --------- Correct Answer ---------- Investment dealers sell newly issued securities to investors As Principals: - Investment dealer agrees to a price with the issuer and buys all of the shares/bonds ("bought deal") - Investment dealer then sells the purchased shares or bonds to investors - The Canadian Securities Association was formed by all 13 securities to co-ordinate provincial activities - Efforts have been made to set up a national securities commission, but resisted Self-Regulatory Organizations (SRO) --------- Correct Answer ---------- - An organization owned by its members that regulate and police themselves - Ex. TSX, IIROC, MFDA IIROC --------- Correct Answer ---------- - Oversees all investment dealer and trading activity in the Canadian debt and equity markets - Monitor member firms for capital adequacy (amount of money that firms must set aside when holding bank deposits/making loans/raising capital for corporations) and business conduct - Serves as the securities industry regulator; formulates standards and policies for markets, and monitors trading activities of member firms Mutual Fund Dealers Association (MFDA) --------- Correct Answer ---------- - Created in 1997 as a result of growth and need for regulation in mutual fund industry - Goal: establish a fund similar to the CIPF to protect mutual fund investors up to $100k per account Canadian Investor Protection Fund (CIPF) --------- Correct Answer ---------- - Protects investors from losses due to bankruptcy of its member firms (most investment firms and stock exchanges) - Role is to anticipate and solve financial difficulties at member firms before bankruptcy - Coverages of up to $1 million Regulation and Investor Protection --------- Correct Answer ---------- - Legislation and regulation designed to protect investors and promote ethical standards - 3 methods: i - Registration of securities dealers and advisors ii - Disclosure of material facts iii - Enforcement of the laws and policies - Investment advisors (IAs) must be registered and must operate in the best interests of their clients - IAs must: not reveal confidential information, avoid conflicts of interests, follow client instructions, ensure all representation to clients are made in good faith - SROs (IIROC, TSX, MFDA) dish out discipline - 4 main areas of member/IA regulation: 1. Financial compliance 2. Sales compliance 3. Registration 4. Enforcement - 3 areas of market regulation: 1. Market surveillance 2. Investigation enforcement and regulatory/market policy 3. Where all transactions converge in one location Ethics of Trading --------- Correct Answer ---------- - Ethical trading is critical to the proper functioning of capital markets - Unethical behaviour can be punished by fines, suspensions, criminal charges - Ex. Deceiving the public (lying), misleading a BoD, violating statutes What are companies required to disclose? --------- Correct Answer ---------- Annual/quarterly financial statements, insider trading reports, information circulars, annual information forms, press releases, material change reports Insider Trading and Reporting --------- Correct Answer ---------- - Legal insider trading providing insider trading rules are adhered to Insiders: CEO/CFO, person who controls >10% of voting securities, buying back own shares, director/senior officer owning >10$ of company Insiders are required to file reports reporting their trading activity in the company in which they are an insider