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AFM 121 FINAL EXAM 2024 | ALL
QUESTIONS AND CORRECT
ANSWERS | ALREADY GRADED
A+ | LATEST VERSION
What are primary markets ------CORRECT ANSWER---------------- securities
- issuer receives money from sale
- it may be an IPO or subsequent equity offering What are secondary markets ------CORRECT ANSWER---------------- where securities previously issued in primary markets are bought and sold
- funds do not go to issuer ex: buying shares of TD - > funds go to seller of shares not TD What is an IPO ------CORRECT ANSWER---------------- initial public offering
- first time company sells shares to public where shares are listed on a stock exchange What are financial intermediaries ------CORRECT ANSWER--------------- people and companies that improve market efficiency by facilitating the flow of capital from buyers to sellers What are some examples of financial intermediaries ------CORRECT ANSWER---------------- bank of Can
- Banks
- Insurance companies
- pension funds
- investment dealers
- private equity / venture capital firms T/F - financial intermediaries work in the interest of others ------CORRECT ANSWER---------------false financial intermediaries may work in their self interest
- regulations are meant to be structured such that market efficiency is a byproduct of this self interest What did the financial crises expose ------CORRECT ANSWER--------------- the financial crises exposed areas where firms were working in their seld interest and also working against market efficiency / productive economy What is an auction market? ------CORRECT ANSWER---------------- like any other market, where items are bought and sold T/F - a stock exchange is an auction market where stocks are bought and sold ------CORRECT ANSWER---------------True a stock exchange is in auction market where all transactions converge in one location What is the main exchange in canada ------CORRECT ANSWER--------------
- TSX (toronto stock)
What do SROs provide ------CORRECT ANSWER---------------they provide oversight and enforcement for some rules
- investment industry regulatory organization of canada (IIROC), TSX, TSX Venture change What are the other SRO players ------CORRECT ANSWER--------------- Canadian Depository for Securities (CDS) Canadian Investor Protection Fund (CIPF) Canadian Securities Institute (CSI) What does the CDS do ------CORRECT ANSWER---------------- clears or settles, trades
- owned by TMX What does the CIPF do ------CORRECT ANSWER---------------insures brokerage account contents (not losses!) What does CSI do ------CORRECT ANSWER---------------offers courses required for licensing by regulators
- owned by Moody's What are investment dealers ------CORRECT ANSWER---------------- small number of national-scope investment dealers
- big banks, few independent
- many small "boutique" investment dealers
- may specialize in specific sectors or products
- multiple departments within an investment dealer
- underwriting, trading, investment banking, brokerage
- chinese wall b/w departments What are brokers ------CORRECT ANSWER---------------brokers can be full service or discount full service
- offers "high touch" service and advice for high fees Discount brokers
- limited services such as stock and bond trade execution but no advice for low fees What is leverage ------CORRECT ANSWER---------------financial services industry is highly leveraged
- short-term borrowing finances long-term investments
- borrow money every 90 days to finance a 20-year mortgage T/F - technological change has affected the finanical industry ------ CORRECT ANSWER---------------true, (particularly in telecomms) since
- increased interconnectedness of markets
- interlisted securities
- multiples listing for securities (apples shares trading on multiples exchanges )
what is an agent investment dealer in a primary market ------CORRECT ANSWER---------------investment dealer markets the shares or bonds to investors on a 'best efforts' basis therefore investment dealer does not purchase what is an investment dealer in a secondary market ------CORRECT ANSWER---------------investment dealers buy and sell securities on financial markets as principals or agents what is an investment dealer in a primary market / new issues ------ CORRECT ANSWER---------------when investment dealers sell newly issued securities to investors what is a principal investment dealer in a secondary market ------ CORRECT ANSWER---------------- invest their own capital and earn a spread b/w purchase and sale prices (aka proprietary or liability trading) what are the 3 components of wealth transfer process ------CORRECT ANSWER---------------1. financial instruments
- financial markets
- financial intermediaries what is a financial instrument ------CORRECT ANSWER---------------what is bought and sold in a financial market
what is a financial market ------CORRECT ANSWER---------------a place that facilitates the buying and selling of financial instruments what are financial intermediaries ------CORRECT ANSWER--------------- people or companies that are involved with financial markets and instruments what is capital ------CORRECT ANSWER---------------savings of
- individuals
- corporations
- governments how is capital utilized/transferred/invested ------CORRECT ANSWER--------- ------direct and indirect investments what is an example of direct investment ------CORRECT ANSWER------------ ---assets that generate wealth (land, real estate, equipment) what are some indirect investment ------CORRECT ANSWER--------------- financial assets such as:
- stocks
- bonds
- tbills
T/F - individuals are users of capital ------CORRECT ANSWER--------------- false, if needed they will go to a bank for a loan who are users of capital ------CORRECT ANSWER---------------- companies / businesses
- governments how do businesses obtain capital ------CORRECT ANSWER---------------- earn money internally through existing operations and reinvest that money
- raise $ by issuing stocks / bonds how do governments obtain capital ------CORRECT ANSWER---------------- t bills
- longer term debt
- Canada savings bonds what do governments spend their funds on ------CORRECT ANSWER------- --------any govnerment spending not covered by tax or other revenues which may include: health care, education, infrastructure spending (roads and what not)
what is the role of financial instruments ------CORRECT ANSWER------------ ---financial instruments are the mechanisms by which wealth/ capital is transferred what is debt ------CORRECT ANSWER---------------- borrowed funds
- funds that must be paid back at the maturity date
- b/w borrowing and maturity date interest payments are paid what is equity ------CORRECT ANSWER---------------- represented typically by stock/shares in a company
- as an equity investor you own part of the company
- voting privileges at annual meetings
- may receive regular dividend payments what is an investment fund ------CORRECT ANSWER---------------buy and sell stocks / bonds typically thru a mutual fund what are derivatives ------CORRECT ANSWER---------------- products that derive their value from another asset (stock, bond etc.)
- often used for hedging (mitigate the effect of a strong C$ or higher oil prices) what is private equity ------CORRECT ANSWER---------------- invest in both debt and equity
- CDS "clears" or "settles" trade (hence term "clearinghouse") as central repository keeping track of who owns each share of a company what does it mean for a trade to be settled ------CORRECT ANSWER-------- -------- cash from buyers brokerage account is transferred on the brokerage account of seller
- share ownership is transferred from seller to buyer what does it mean for CDS to clear or settle the trade ------CORRECT ANSWER---------------- registered owners have their name on share certificate (really a book entry)
- shares in "street"
- broker keeps track of individual client ownership T/F - banks collect money from depositors and lend to borrowers ------ CORRECT ANSWER---------------true T/F banks earn the difference b/w cost of borrowing and revenue from lending ------CORRECT ANSWER---------------true banks earn difference of borrwing (interest paid to depositors) and revenue (interest paid by borrowers) T/F banks are governed by different acts ------CORRECT ANSWER---------- -----true banks in Canada are governed by the Bank Act (among other acts) what are the 3 schedules in chartered banks ------CORRECT ANSWER----- ----------schedule 1 : domestic banks
schedule 2: subsidiaries of foreign banks schedule 3: branches of foreign banks what are the big six banks and what schedule are they under ------ CORRECT ANSWER---------------BMO,BNS,CIBC,NA,RY,TD and they are all schedule 1 banks
- also called "conglomerate" banks or banking institutions
- own subsidiaries in non-banking areas like insurance and investments what are other bank like companies ------CORRECT ANSWER--------------- Trusts and Mortgage Companies
- currently similar to banks, but can also act as trustees credit unions and caisses populaires
- owned by customers/ depositors
- profit returned to owners no focused on profits what do life insurance companies do ------CORRECT ANSWER--------------- match liabilities (death) with assets
- invest mostly in long-term fixed income products T/F - insurers can own trusts and offer banking and investment products --- ---CORRECT ANSWER---------------true T/F - small life insurers used to be owned by policyholders but "demutualized" to become private companies ------CORRECT ANSWER----
what is an open-ended fund ------CORRECT ANSWER----------------no fixed
of units outstanding
- investor can only purchase and redeem units from/with investment fund what are pension plans ------CORRECT ANSWER---------------its sort of like an income when you are retired
- they may be government sponsored or company sponsored what is a government sponsored pension plan ------CORRECT ANSWER--- ------------CPPIB (everyone), OMERs (municipal employees), OTPP (teachers) T/F - large government sponsored pension plans have become significant players in global financial markets ------CORRECT ANSWER--------------- true and they have a conservative long term focus where they match expecteed payoff investments with expected liabilities which financial statement is underfunding showed on ------CORRECT ANSWER---------------underfunding shows up on the balance sheet what is the OSFI ------CORRECT ANSWER---------------office of thee superintendent of financial institutions what does the OSFI do ------CORRECT ANSWER----------------regulates and supervises banks, insurance, trust and loan companies, pension plans
- does not supervise Canadian securities industry - > this is done provincially what does the CDIC do ------CORRECT ANSWER---------------- insures deposits up to 100k per depositor in each financial institution
- you personally can be insured for a total greater than 100k insurance is for each account (eg. bank account, mortgage)
- this insurance is not for mutual funds, stocks, bonds what type of company is CDIC ------CORRECT ANSWER---------------crown corporation what dose CDIC stand for ------CORRECT ANSWER---------------Canadian deposit insurance corporation what is a provincial regulator ------CORRECT ANSWER---------------- canadian securities industry is regulated provincially
- each province has its own securities commission (OSC in ontario) how is the Canadian securities association formed ------CORRECT ANSWER---------------- the Canadian association was formed by all 13 securities commissions to provide a national umbrella group to co-ordinate provincial activities (but only co-ordinate)
- there have been efforts to set up national securities commissions however these efforts were resisted by some provincial commissions
T/F - IIROC is an extremely important part of a properly functioning Canadian capital environment ------CORRECT ANSWER---------------True due to the great recession, IIROC is very important to a properly functioning Canadian capital environment who was affected most by the financial crises/ great recessiomn ------ CORRECT ANSWER---------------Europe the most but CAN and US were also affected when and why was the MFDA created - -----CORRECT ANSWER--------------
- created in 1997 as a result of growth and need for regulation in the mutual fund industry what is the goal of the MFDA ------CORRECT ANSWER---------------to establish a fund similar to the Canadian Investor Protection Fund (CIPF) to protect mutual fund investors up to 100k per account
- funded by MFDA member firms \what is the CIPF ------CORRECT ANSWER---------------CIPF stands for Canadian Investor Protection Fund and it protects investors from losses due to bankruptcy of its member firms (most investment dealers and stock exchanges) what is the role of the CIPF ------CORRECT ANSWER---------------to anticipate and solve financial difficulties at member firms before bankruptcy occurs
- provides coverage of up to $1 million related to losses from security holdings and cash balances - if a member firm goes bankrupt
- no losses covered as a result of change of market values what is the purpose of legislation and regulation? ------CORRECT ANSWER---------------legislation and regulation is designed to protect investors and promote ethical standards who establishes regulation and legislation standards? ------CORRECT ANSWER---------------provincial securities regulators establish these regulations What is the fundamental principle of many regulations ------CORRECT ANSWER---------------to ensure that full, true and pplain disclosure of all material facts relating to the securities offered is provided to investors what are the 3 basic methods used to protect investors ------CORRECT ANSWER---------------1. registration of securities dealers and advisors
- disclosure of material facts
- enforcement of laws and policies T/F - sellers of securities and investment advisors do not need to be registered ------CORRECT ANSWER---------------false, they must be registered
