Canadian Securities Course Volume 1

Test # 1B Chapters 1 – 7

Student Name ______________________ Student Number___________________

1. When stock trading takes place on the secondary market…

a) an investor is buying shares from the issuing company.

b) the issuing company is buying shares from an investor.
c) an investor is buying shares from another investor.
d) trading in stocks does not take place on the secondary market.

2. Almost all bonds and debentures are sold through…

a) auction markets.
b) dealer markets.
c) Bonds are sold through dealer markets. Debentures are sold through
auction markets.
d) Bonds are sold through auction markets. Debentures are sold through
dealer markets.

3. CDIC insures eligible deposits up to ____ per deposit in each member institution.

a) $ 50,000
b) $ 100,000
c) $ 150,000
d) $ 1,000,000

4. What occurs when the Government of Canada’s revenues fail to meet

expenditures?

a) The Government runs a deficit and it must spend money.

b) The Government runs a deficit and it must borrow money.
c) The Government runs a surplus and it must raise taxes.
d) The Government runs a surplus and it must cut spending.

5. The value of all goods and services produced in a country in a year is known
as…
a) Net National Product
b) Net Domestic Product
c) Gross Domestic Product
d) Gross National Product

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6. “Inflation is stable… Corporate profits are rising and new business start-ups
outnumber bankruptcies”… describes which phase of the business cycle?

a) peak
b) expansion
c) contraction
d) trough

7. All of the following are major functions of the Bank of Canada except…

a) to prepare balanced federal budgets.

b) to conduct monetary policy.
c) to issue and remove bank notes.
d) to act as the government’s fiscal agent.

8. The overnight rate operates within a band of ____ basis points.

a) 50
b) 75
c) 100
d) 200

9. A popular definition of a recession is at least…

a) two declining quarters of nominal GDP.

b) two declining quarters of real GDP.
c) four declining quarters of real GDP.
d) the same as the Statistics Canada definition: The depth, duration and
diffusion of the decline in business activity.

10. In the United States, the Federal Reserve Board is raising interest rates. In order
for Fiscal Policy to be consistent with this action, the American government
should…

a) cut income taxes.

b) spend more on higher education.
c) spend less on the military and Medicare
d) reduce tariffs on Chinese imports.

11. If the yield of a bond is greater than its coupon rate...

a) it is trading at a premium.
b) it is trading at a discount.
c) the investor is losing money.
d) the investor is making money.

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12. The Canada Yield Call feature means...

a) that the Government of Canada reserves the right to call in bonds at

any time.
b) that the Government of Canada reserves the right to call in bonds at
any time at par value plus accrued interest.
c) that the corporate issuer can call the bond at any time, as long as
Government of Canada bonds with similar maturities are also callable.
d) that the corporate issuer can call its bond based on a yield spread
with an equivalent Government of Canada bond.

13. A1 Mining Company issued a 15-year convertible bond, each $1,000 face value
convertible into 20 common shares. The bond had the forced conversion
featured attached to it. That feature would most likely be utilized if the price of the
common shares were…

a) at $50 per share.

b) above $50 per share. $1,000/20 = $50
c) below $50 per share.
d) Insufficient information.

14. All of the following statements are true with respect to treasury bills except…

a) the difference between the issue price and par represents the return on
investment.
b) they are short-term government obligations offered in denominations
of $1,000 to $1,000,000.
c) they are sold every two weeks at auction by the Minister of Finance
through the Bank of Canada.
d) they pay interest at maturity.

15. A real return bond issued by the Government of Canada uniquely protects the
investor against…

a) the risk of deflation.

b) the risk of default.
c) the risk of inflation.
d) the risks of inflation and default.

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 16. A strip bond….

a) is sold at a discount and matures at par. It makes regular interest

payments.
b) is sold at a premium and matures at par. It makes regular interest
payments
c) is sold at a discount and matures at par. It does not make regular
interest payments is sold at par and matures at par.
d) It makes regular interest payments.

17. Which of the following is least likely to be true of GICs?

a) All GICs are non-redeemable.

b) Many GICs offer compound interest.
c) GICs can be used as collateral for loans.
d) CDIC does not cover GICs with maturities in excess of five years.

Please refer to the following bond quote for Questions #18 and #19…
Issue Coupon Maturity Bid Ask Current
Date Yield
XYZ Corp. 5.00 1 June/20 101.20 101.40 4.93%

18. How much would it cost to buy $10,000 face of this bond?

a) $10,140 plus accrued interest $10,000 x 1.0140 = $10,140

b) $10,120 plus accrued interest
c) $10,000 plus accrued interest
d) $10,000

19. Since this security was issued, interest rates have increased slightly. Given this
fact, which of the following is most likely true?

a) Moody’s has changed PQR’s debt rating from AA to A.

b) XYZ’s credit quality has improved.
c) The company’s business has deteriorated.
d) None of the above provides a reasonable explanation.

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20. A bond’s present value is found by…

a) adding the future value of the bond’s coupon payments and the future
value of the bond’s principle at maturity.
b) adding the present value of the bond’s coupon payments and the
present value of the bond’s principal to be received at maturity.
c) adding the present value of the bond’s coupon payments and the
future value of the bond’s principal to be received at maturity.
d) adding the future value of the bond’s coupon payments and the
present value of the bond’s principal to be received at maturity.

21. What is the present value of the second coupon of a 5% semi-annual pay bond
trading at 92, assuming a discount rate of 7%. (Base your answer on $1,000
face.)

a) $21.47
b) $23.34 Coupon = $25 PV = $25/1.035 ^2 = $23.34
c) $24.84
d) $43.67

22. An 8% annual pay bond with face value of $100,000 is currently trading at 92. It
has three years to maturity. Should an investor with a 10% discount rate
purchase this security?

a. Yes, because its current market price of $92,000 is less than its issue
price of $100,000.
b. Yes, because its present value of $95,026 is more than its current
price of $92,000.
N=3, I/Y=10, FV=100,000, PMT=8,000, CPT PV= 95,026
c. No, because its present value of $95,026 is less than its issue price of
$100,000.
d. No, because the discount rate of 10% exceeds the bond’s 8% coupon.

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23. A T-Bill with 80 days to maturity is priced at 99.25. What is its effective yield?

a) 3.20%
b) 3.32%
c) 3.40%
d) 3.45% .75/99.25 x 365/80 x 100 = 3.45%

24. A semi-annual bond with a 5% coupon is currently trading at 94. It has four
years to maturity. Its current yield is…

a) 2.50%
b) 5.32% 5/94 x 100 = 5.32%.
c) 5.65%
d) Insufficient information.

25. An investor goes into a bank and sees that a one-year GIC is paying 2%. This
refers to its…

a) inflation-adjusted return.
b) real return.
c) nominal return.
d) Both a) & b)

26. The graph depicting the term structure of interest rates is known as the…

a) bond curve.
b) yield curve.
c) real return graph.
d) nominal return graph.

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27. According to Expectations Theory, if the yield curve is upward-sloping…

a) the market expects the economy to slip into recession.

b) the market expects interest rates to be higher in the future.
c) the market expects interest rates to be lower in the future.
d) the market expects more supply to come to the market in the future.

28. Duration measures…

a) reinvestment risk.
b) interest rate risk.
c) Both interest rate risk and reinvestment risk.
d) Neither interest rate risk nor reinvestment risk.

29. Which of the following bonds would likely be least volatile?

a) 10-year GOC bond with a 10% coupon.

b) 10-year GOC bond with a 5% coupon.
c) 5-year GOC bond with a 10% coupon.
d) 5-year GOC bond with a 5% coupon.

30. An investor held a $250,000 face value 5% Government of Canada semi-annual

pay bond that pays interest on April 15th and October 15th, and matures in 2020.
When it was trading at 98, he sold it. If the trade settles on June 24th, the buyer
of the bond owes the seller of the bond accrued interest of…

a) $2,176.37.
b) $2,397.26.
Days to next coupon payment: 70 (April 15 + May 31 + June 24)
250,000 x .05 x 70/365 = $2,397.26

c) $3,869.86.
d) $8,630.14.

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