CSC2 Canadian Securities Course Exam2 Questions and Answers

Rules-based ETFs, also known assmart beta ETFs, use predetermined rules or algorithms to select and weight securities in their portfolios. These ETFs aim to outperform traditional market-capitalization-weighted ETFs by targeting specific factors such as value, momentum, quality, or volatility.

Strategic Factor Weighting: Securities are weighted based on fundamental or quantitative factors, not just market capitalization.

Higher Returns Potential: These ETFs are designed to capture excess returns (alpha) relative to a benchmark.

Lower Costs: Smart beta strategies often combine active and passive management elements at a lower cost than traditional active funds.

A. Rules-based: Correct answer. Smart beta ETFs are built on rule-based frameworks designed to achieve specific investment objectives.

B. Standard: Refers to traditional, market-cap-weighted ETFs, not smart beta.

C. Synthetic: Refers to ETFs that use derivatives to replicate returns of an underlying index, unrelated to smart beta.

D. Index-based: Includes standard ETFs tracking an index but does not apply specifically to smart beta.

Characteristics of Smart Beta ETFs:Explanation of Options:References:

CSC Volume 2, Chapter 19: Smart Beta and Rules-Based ETFs, which describes their unique features, benefits, and strategies​.

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​.

Beta is a measure of a stock's volatility compared to the overall market. Stocks with lower betas tend to experience smaller price fluctuations relative to the market.

Utilities:Utility companies generally have stable and predictable revenue streams because they provide essential services like electricity, water, and gas, which are always in demand regardless of economic cycles. As a result, utility stocks have lower betas, reflecting their lower sensitivity to market movements.

Why Other Options Are Incorrect:

A. Transportation: Stocks in this sector are more sensitive to economic changes and fuel prices, leading to higher betas.

B. Capital Goods: This sector involves investments in industrial equipment and machinery, which fluctuate with economic cycles and have higher betas.

D. Automobiles and Components: This industry is cyclical and highly dependent on economic trends, leading to higher betas.

References:

CSC Volume 2, Chapter 13: Risk and return in specific industries​.

The return on a security held for a specific period, such as 18 months, without adjusting for time or compounding, is referred to as theholding period return (HPR). This straightforward calculation assesses total returns over the period of ownership.

1. Definition of Holding Period Return:The HPR is calculated as:

HPR=(Ending Value - Initial Value) + Dividends ReceivedInitial ValueHPR = \frac{{\text{(Ending Value - Initial Value) + Dividends Received}}}{{\text{Initial Value}}}HPR=Initial Value(Ending Value - Initial Value) + Dividends Received​

This measure evaluates total growth, disregarding compounding or annualization.

2. Other Return Types (Incorrect Answers):

Effective Rate of Return:Reflects annualized returns considering compounding within a year. It is not applicable to non-annualized periods like 18 months.

Nominal Rate of Return:The unadjusted rate of return without accounting for inflation. While related, it does not specifically refer to the holding period concept.

Annualized Total Return:This adjusts returns to reflect an annual basis, assuming constant performance throughout the period. It is unsuitable for raw, unadjusted returns like the HPR.

References from CSC Study Documents:

Chapter 15, Volume 2: Covers the calculation of different return metrics, with detailed examples of HPR and its application​.

Portfolio Return Analysis inSection 15explains the non-compounded nature of holding period calculations​.

Let me know if further details or clarifications are needed!

To calculate Franco’s total capital gain, we adjust the adjusted cost base (ACB) for reinvested distributions and return of capital (ROC).

Initial ACB: $30,000.

Add Reinvested Distributions: Reinvested distributions increase the ACB.30,000+1,750=31,75030,000 + 1,750 = 31,75030,000+1,750=31,750

Subtract Return of Capital: ROC reduces the ACB.31,750−850=30,90031,750 - 850 = 30,90031,750−850=30,900

Calculate the Capital Gain: Subtract the adjusted ACB from the sale price.39,000−30,900=8,10039,000 - 30,900 = 8,10039,000−30,900=8,100

A. $1,250: Incorrect, likely a miscalculation of adjusted ACB.

B. $8,100: Correct, based on accurate ACB adjustments and sale price.

C. $6,400: Incorrect, ignores reinvested distributions.

D. $9,000: Incorrect, ignores the impact of ROC adjustments on ACB.

Step-by-Step Calculation:Explanation of Options:References:

CSC Volume 2, Chapter 19: Adjusted Cost Base Calculations, which explains the impact of reinvested distributions and ROC on capital gains​.

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​.

F-class funds are designed for fee-based accounts, where investors pay advisors a separate fee for services rather than a commission. This structure impacts the Management Expense Ratio (MER).

Management Expense Ratio (MER):

F-Class Funds: Exclude embedded advisor commissions, resulting in lower MER. These funds are cost-effective for investors in fee-based arrangements.

Front-End Funds: Include advisor commissions as part of the MER, increasing overall costs.

Fee Structure:

F-class funds charge a flat management fee without embedded commissions, offering more transparency.

Front-end funds involve a sales charge (front-end load) that compensates advisors directly at the time of purchase.

Key Differences Between F-Class and Front-End FundsWhy A is CorrectThe lower MER of F-class funds reflects the absence of embedded advisor fees, making them more attractive to fee-conscious investors.

References:

Volume 2, Section 25: Fee-Based Accounts—Advantages and Structure of F-Class Funds​.

Volume 2, Section 17: Mutual Funds—Charges Associated with Funds​.

Commodity Exchange-Traded Funds (ETFs) provide investors with exposure to commodities such as gold, oil, and agricultural products. The most suitable type of commodity ETF for gaining exposure to the spot price of a commodity is thePhysical-based ETFbecause it involves direct ownership or storage of the commodity. For instance, gold ETFs backed by physical gold store bullion in vaults.

1. Physical-based ETFsThese ETFs hold the actual commodity in physical form, which ensures a close tracking of the spot price. Physical gold ETFs, for example, store gold bars and adjust the NAV (Net Asset Value) based on the current spot price. This eliminates discrepancies caused by futures contracts or swaps, making them ideal for tracking spot prices.

2. Swap-based ETFsThese rely on derivative agreements (swaps) to replicate the price movements of a commodity. While cost-effective, they do not hold the actual commodity, and their performance may slightly deviate from the spot price due to tracking errors or counterparty risks.

3. Futures-based ETFsThese use futures contracts to gain exposure. However, futures contracts come with complexities such as contango and backwardation, which can cause performance differences from the spot price over time.

4. Equity-based ETFsThese invest in shares of companies involved in the commodity sector (e.g., mining or energy companies). Their performance is influenced by company-specific factors and broader equity market trends, making them unsuitable for tracking spot prices.

References from CSC Study Documents:

Exchange-Traded Funds, Chapter 19, Volume 2: Discusses the characteristics and structure of ETFs, includingcommodity-based ETFsand their classification​.

Risks related to tracking error and direct ownership of assets are highlighted under ETF types inSection 19​.

To reduce a national deficit, governments canincrease taxationto generate more revenue. This measure, combined with controlled spending, helps reduce the shortfall between revenues and expenditures.

B. Increase government spending: This would increase the deficit further unless matched by revenue increases.

C. Decrease taxation: This would reduce revenue and worsen the deficit.

D. Increase interest rates: This impacts monetary policy and borrowing costs but does not directly reduce a fiscal deficit.

The dividend discount model (DDM) is based on the premise that a company’s intrinsic value is the present value of all future dividends. This model works best when:

Dividends are stable or follow a predictable growth rate.

The company has an established dividend payout history.

Inapplicability to Fluctuating Dividend Patterns:A company with changing dividend payments and fluctuating growth rates lacks the consistency required for the DDM. The fluctuating nature introduces uncertainty, making it difficult to estimate future dividends accurately. This diminishes the model’s reliability in valuing such companies.

Comparison with Other Options:

Option A:Changing dividend payments but a stable growth rate could still provide a predictable valuation framework using DDM.

Option B:Stable dividends and a stable growth rate align perfectly with DDM assumptions.

Option C:Stable dividends and fluctuating growth rates are more predictable than Option D.

Supporting Study Material References:

Volume 2, Chapter 13 (Fundamental Analysis):Explains the relevance of consistent dividend patterns in equity valuation, emphasizing

When an investor or portfolio manager adheres to the belief in market efficiency—specifically the strong form of theEfficient Market Hypothesis (EMH)—it implies that all information (public and non-public) is fully reflected in security prices. This belief diminishes the value of active investment strategies, such as fundamental or technical analysis, as these approaches presume the possibility of identifying undervalued or overvalued securities.

As such, the logical approach in this scenario would be to adopt apassive investment strategy. This includes constructing a portfolio ofexchange-traded funds (ETFs)or index funds that replicate the performance of a broad market index, such as the S&P/TSX Composite Index. A passive approach aligns with the principle of market efficiency, as it avoids attempts to outperform the market, which are considered futile under the EMH.

References:

Volume 2, Chapter 13: Fundamental and Technical Analysis, Efficient Market Hypothesis,Canadian Securities Course​​.

TheCanadian Investment Regulatory Organization (CIRO)is responsible for overseeing trading and market-related activities of participants on Canadian equity marketplaces. CIRO conducts surveillance to ensure compliance with rules, regulations, and fair market practices.

Other options:

OBSI (Ombudsman for Banking Services and Investments): Handles disputes between financial institutions and their clients but does not conduct trading surveillance.

OSFI (Office of the Superintendent of Financial Institutions): Regulates and supervises federally regulated financial institutions, focusing on their solvency.

CSA (Canadian Securities Administrators): Coordinates securities regulation across Canada but does not directly monitor trading activities.

References:

Volume 1, Chapter 3:The Canadian Regulatory Environment, section on "Market Surveillance and Trading Oversight" explains CIRO's role​.

In the context of sell-side equity revenue, when a dealer acts as anagentfor a client’s trade, the revenue is typically earned as acommission. The dealer facilitates the trade between buyers and sellers without taking ownership of the securities, earning fees for providing this service.

Commission: Earned when the dealer acts as an agent.

Spreads: Earned when the dealer acts as a principal, buying securities at one price and selling at a higher price.

Fees: Charged for additional services, such as research or analytics.

Interest: Earned from financing activities or margin accounts, not directly tied to trading.

A. Fees: Incorrect; fees are typically charged for services, not for acting as an agent.

B. Spreads: Incorrect; spreads are earned when the dealer acts as a principal.

C. Interest: Incorrect; interest revenue is unrelated to acting as an agent.

D. Commission: Correct answer. Acting as an agent involves earning commissions for facilitating trades.

Types of Revenue in Sell-Side Trading:Explanation of Options:References:

CSC Volume 2, Chapter 27: The Role of Sell-Side Dealers, which details revenue models in institutional and retail trading​.

Exchange-traded notes (ETNs) are debt instruments issued by financial institutions that provide returns linked to a specified index or benchmark. Unlike exchange-traded funds (ETFs) or mutual funds, ETNs do not hold assets like stocks or bonds. Instead, they rely on the issuer’s creditworthiness. Tracking error occurs when the performance of an investment fund deviates from its benchmark index due to operational factors like fees, rebalancing, or dividend treatment. Since ETNs directly track the performance of the underlying index through a structured debt instrument, they are immune to the operational causes of tracking error.

References:

CSC Volume 2, Chapter 23: Structured Products – Types and Features​.

CSC Volume 2, Chapter 19: Exchange-Traded Funds – Tracking Error Risks and Benefits​.

Thereal rate of returnrefers to the return on an investment adjusted for the effects of inflation. Unlike nominal return, which reflects the raw return of an investment without considering inflation, the real return provides a clearer measure of an investment’s actual purchasing power.

Formula for Real Rate of Return:The formula for calculating real rate of return is:Real Return=Nominal Return−Inflation Rate\text{Real Return} = \text{Nominal Return} - \text{Inflation Rate}Real Return=Nominal Return−Inflation Rate

For example, if an investment generates a nominal return of 5% and inflation during the period is 2%, the real return would be 3% (5% - 2%).

A. Ex-ante: Refers to a forecasted return, not necessarily adjusted for inflation.

B. Nominal: Measures the raw return without accounting for inflation.

C. Ex-post: Refers to a return based on historical data, which can be nominal or real.

D. Real: The correct answer, as it specifically accounts for inflation to measure the actual growth in purchasing power.

Explanation of Options:References:

CSC Volume 2, Chapter 15: Real Returns and the Effect of Inflation, which explains the difference between real and nominal rates of return and their application in investment analysis​.

Manyrobo-advisorsoffer a hybrid model where an automated portfolio recommendation is supplemented by human oversight. A telephone call with an advisor ensures the portfolio generated by the algorithm aligns with the client’s risk tolerance and investment objectives. This step helps meet regulatory suitability requirements.

A. The service is exclusively provided to intermediaries such as advisors and employers: Robo-advisors are directly available to retail clients and are not exclusive to intermediaries.

B. The portfolios are rarely rebalanced: Robo-advisors typically offer frequent or automatic rebalancing to maintain target asset allocations.

C. Portfolios are built primarily with individual stocks and bonds: Robo-advisors predominantly use ETFs for diversification and cost-efficiency, not individual securities.

Closet indexing is a controversial practice where a fund manager claims to actively manage a portfolio but instead mirrors an index closely. This practice undermines the very premise of active management.

Lack of Value Addition: Investors pay higher fees for active management without receiving the expected benefits, as the portfolio closely tracks a benchmark index.

Deceptive Marketing: Funds marketed as actively managed may mislead investors, violating transparency principles.

Limited Alpha Generation: Since the portfolio resembles an index, it often fails to deliver excess returns ("alpha"), defeating the purpose of active management.

Regulatory Concerns: Closet indexing raises ethical questions and can lead to scrutiny by regulatory bodies.

Main Pitfalls of Closet IndexingWhy C is CorrectOption C highlights the core issue of closet indexing—misrepresenting a passively managed portfolio as active, leading to higher fees without the commensurate effort or performance.

References:

Volume 2, Section 18: Mutual Funds—Indexing and Closet Indexing​.

Volume 2, Section 13: Portfolio Manager Styles—Active vs. Passive Management​.

To calculate theallowable capital loss, we must first determine theadjusted cost base (ACB)and theproceeds of disposition (POD), then subtract the latter from the former. Commissions on both the purchase and sale are included in the calculation.

Step-by-Step Explanation:

Purchase Details:

Number of shares purchased: 1,000

Purchase price per share: $16

Total purchase cost before commission: $16 × 1,000 =$16,000

Add purchase commission:$25

Adjusted cost base (ACB): $16,000 + $25 =$16,025

Sale Details:

Number of shares sold: 1,000

Sale price per share: $12

Total sale proceeds before commission: $12 × 1,000 =$12,000

Deduct sale commission:$50

Proceeds of Disposition (POD): $12,000 - $50 =$11,950

Capital Loss Calculation:

Capital loss = ACB - POD

Capital loss = $16,025 - $11,950 =$4,075

Allowable Capital Loss:

In Canada,50% of the capital lossisallowablefor tax purposes.

Allowable capital loss = 50% × $4,075 =$2,038

Final Answer:

Option A ($2,038):Correct.

Option B ($2,025):Incorrect; likely excludes commissions or contains a minor calculation error.

Option C ($1,925):Incorrect; this does not account for the full adjusted cost base or allowable percentage.

Option D ($2,013):Incorrect; this likely contains a rounding error or miscalculation.

References to Canadian Securities Course Exam 2 Study Materials:

Volume 2, Chapter 24 – Canadian Taxation

Discusses the calculation of adjusted cost base (ACB), proceeds of disposition (POD), and allowable capital losses​.

Volume 1, Chapter 11 – Corporations and Their Financial Statements

Details financial concepts like capital gains, losses, and the treatment of commissions in securities transactions​.

Volume 2, Chapter 26 – Working with the Retail Client

Covers tax implications and planning for securities transactions​.

Dividends from foreign corporations are taxed at the taxpayer's marginal tax rate because they are treated as regular income in Canada. Unlike Canadian dividends, which may qualify for a dividend tax credit to reduce the effective tax rate, foreign dividends do not receive preferential tax treatment under Canadian tax law.

Marginal Tax Rate: The rate at which the taxpayer’s last dollar of income is taxed. Since foreign dividends do not qualify for tax credits, they are taxed as ordinary income.

Double Taxation Relief: While foreign dividends are fully taxable in Canada, tax treaties between Canada and other countries may allow a foreign tax credit to offset taxes paid to the foreign jurisdiction. However, this does not alter their treatment under the marginal tax rate.

Other options provided in the question:

Dividends not eligible for the dividend tax credit (Option C)are usually taxed at a higher rate, but Canadian non-eligible dividends receive some preferential treatment, unlike foreign dividends.

Foreign property valuation (Options B and D)is relevant for reporting requirements under Canadian tax laws, such as the T1135 Foreign Income Verification Statement, but does not affect the taxation of foreign dividends.

References:

CSC Volume 2, Chapter 24: "Canadian Taxation," details the treatment of foreign income, including dividends and foreign tax credits​.

A market order executes immediately at the best availableask pricefor a purchase transaction. In this case, the bid/ask initially was $10.25/$10.75. However, before execution, the ask price updated to $10.70, meaning Anwar will pay $10.70 per share.

B. $10.75: This was the previous ask price but is no longer valid after the update.

C. $10.29: This value is not relevant to the current bid/ask spread.

D. $10.20: This represents the updated bid price, which applies to sell orders, not buy orders.

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.

A white sheet with black text Description automatically generated

Explanation of Answer Options:

Option A ($9.90): Incorrect; this value does not reflect the subtraction of liabilities.

Option B ($11.90): Correct; it accounts for the subtraction of liabilities and proper division by outstanding units.

Option C ($12.00): Incorrect; it represents the market value of assets per unit without deducting liabilities.

Option D ($10.00): Incorrect; this value does not align with the given data or calculations.

References to Canadian Securities Course Exam 2 Study Materials:

Volume 2, Chapter 17- Mutual Funds: Structure and Regulation, Pricing Mutual Fund Units:

Discusses the formula for calculating NAV per share, including the treatment of liabilities and market value of assets​.

Volume 2, Chapter 22- Other Managed Products:

Covers the concept of valuation for managed funds and its importance for accurate pricing​.

Volume 1, Chapter 11- Corporations and Their Financial Statements:

Provides foundational knowledge about book and market values used in calculations​.

Thecoupon rateof the bond remains fixed at5%, as it is based on the bond's original par value of $100. Thecurrent yield, however, decreases because the bond's price has increased to $102.75. Current yield is calculated as:

Current Yield=Coupon PaymentCurrent Price\text{Current Yield} = \frac{\text{Coupon Payment}}{\text{Current Price}}Current Yield=Current PriceCoupon Payment​

Given:

Coupon Payment= $5

Current Price= $102.75

Current Yield=5102.75≈4.87%\text{Current Yield} = \frac{5}{102.75} \approx 4.87\%Current Yield=102.755​≈4.87%

A. The coupon is higher than 5%: The coupon remains fixed at 5%.

B. The current yield is higher than 5%: The current yield is lower than 5% due to the increased price.

D. The coupon is lower than 5%: The coupon does not change with the bond's price.

Trade-matching is a critical process in institutional trading, ensuring that details of a trade (e.g., price, quantity, and settlement terms) align among the involved parties, including the investor, dealer, and custodian. In Canada, institutional trade matching must occur within a specific timeline, and the investor is responsible for providing trade-matching elementsafter the trade execution notice is issued by the dealer.

Step-by-Step Explanation:

What is Trade Matching?Trade matching involves the comparison of trade details between the buyer and seller (and their intermediaries) to confirm accuracy and reduce settlement risks.

When Does the Investor Provide Trade-Matching Elements?

After the dealer executes the trade, the dealer issues atrade execution noticeto the investor.

The investor must then provide the necessary trade-matching details, such as account information, settlement instructions, and any other required confirmations.

This process ensures that the trade can move seamlessly through to settlement.

Why Not Other Options?

Option B (Once the custodian confirms the trade):Incorrect. The custodian’s role is typically involved in the final settlement process and not in providing trade-matching details.

Option C (With the initial order):Incorrect. Trade-matching details are provided after the trade is executed, not at the time the order is placed.

Option D (Once the trade clears):Incorrect. Trade matching occurs before the trade clears to ensure settlement.

References to Canadian Securities Course Exam 2 Study Materials:

Volume 2, Chapter 27 – Institutional Clearing and Settlement

Highlights the process of institutional trade matching, the roles of the investor, dealer, and custodian, and the required timelines​.

Volume 2, Chapter 27 – The Sell Side and the Buy Side of the Market

Explains trade execution and the responsibilities of institutional clients and their intermediaries in completing trades​.

Final Answer:

Option A (After the dealer issues a trade execution notice): Correct.

Other options are incorrectbased on the standard processes for institutional trade matching in Canada.

Asset-Backed Commercial Paper (ABCP)andMortgage-Backed Securities (MBS)are both forms of securitized assets, but they differ in structure and purpose:

ABCP Features:ABCP is a short-term investment backed by a pool of assets such as receivables, loans, or leases. It is designed to provide high liquidity with shorter maturities, often less than a year. This contrasts with MBS, which typically has longer maturities tied to underlying mortgages.

Key Differences:

Liquidity: ABCP is highly liquid and used for short-term financing needs.

Maturity: ABCP generally has maturities of less than a year, while MBS has longer terms.

Risk: MBS carries additional interest rate and prepayment risks due to its mortgage backing.

Why Other Options Are Incorrect:

A. ABCP minimizes roll-over risk: Roll-over risk exists with ABCP, as investors may need to reinvest upon maturity.

C. ABCP offers maturity dates of at least three years: ABCP typically has much shorter maturities.

D. ABCP guarantees principal repayment if held to maturity: This guarantee depends on the underlying assets and is not inherent in all ABCP.

References:

CSC Volume 2, Chapter 23: Securitized products including ABCP and MBS​.

The principle of retraction in retractable preferred shares allows the shareholder to force the issuing company to redeem the shares for cash at a predetermined price on or after a specified date. This feature is identical toretractable bonds and debentures, which give the bondholder the option to require the issuer to repay the principal before maturity.

A. Callable preferred shares: Callability benefits the issuer, not the holder, and is not similar to retraction.

B. Retractable common shares: Such securities are not common in the market and are not comparable to retractable preferred shares.

C. Redeemable preferred shares: Redemption is at the issuer’s discretion, unlike retraction, which is at the holder’s discretion.

Responsible investing (RI) incorporatesenvironmental, social, and governance (ESG) factorsinto investment decisions. This approach combinesvalues-basedinvesting (aligning investments with personal or institutional ethics) andvaluation-basedinvesting (analyzing ESG factors to assess potential risks and returns).

A. It is unavailable with certain asset classes like segregated funds: RI is increasingly available across various asset classes, including segregated funds.

B. ESG factors are standardized across the investment industry: ESG standards vary and are not uniformly applied.

D. It bases investment decisions exclusively on environmental factors: RI considers environmental, social, and governance factors, not just environmental concerns.