Free CSC Volume 2 Questions and Answers — Questions and Answers
Question 1: Which monetary policy alternatives should the Bank of Canada select to raise inflation expectations given that inflation is substantially lower than expected?
- Encourage banks to lend than usual
- Buy 5 year Treasury Bond in the open market
- Sell T-Bills to chartered banks (Correct answer)
- Increase the Bank Rate
Correct answer: Sell T-Bills to chartered banks
Inflation expectations are simply the rate at which investors, consumers and businesses expect prices to rise in the future. If the Bank of Canada (BoC) buys Treasury Bonds, the government places deposits in the chartered banks to settle the purchases. By doing this, the BoC increasing excess reserves.
Question 2: Exactly three years after its issuance, an investor buys $1,000 par value of a 10-year bond with a 1-% anul coupon rate for $115. What is the yield on the bond when it matures?
- 7.31%
- 8.70%
- 7.20% (Correct answer)
- 11.51%
Correct answer: 7.20%
The number of years to maturity in the yield to maturity calculation is seven, not ten. <br> <br> The calculation is <br> FV = 1,000 <br> N = 7, PV = $-1,150 <br> PMT = 100 <br> I = 7.20%
Question 3: What might make a company's retained earnings drop in the next years?
- The company completes a 2 for 1 share split on all outstanding shares
- The company buys back existing shares
- The company's common shares are expected to decrease (Correct answer)
- The company doubles it dividend
Correct answer: The company's common shares are expected to decrease
Profits accumulated over time that have not been distributed as dividends to shareholders are known as retained earnings. The board of directors decides to raise the dividend, which lowers retained earnings or cash in the company, even if these retained profits belong to the shareholders. A record of the entire comprehensive income maintained by the company year after year is provided by retained earnings.
Question 4: The management of ZZZ Corp. said on January 1st that all shareholders of record as of Thursday, January 21st, would receive a dividend, which would be paid on January 31st. When do the shares start trading ex-dividend?
- Tuesday, January 19th
- Thursday, January 21st
- Wednesday, January 20th
- Friday, January 22nd (Correct answer)
Correct answer: Friday, January 22nd
The distribution of profits to shareholders is represented by dividends. Dividends are paid to shareholders "on record," which implies that in order for an investor to get the dividend, they must own shares on the record date. Stocks trade one business day ahead of the record date, ex-dividend. Holidays and weekends are not business days.
Question 5: Shares in a non-registered trading account belong to Nigel. When the value of his shares has increased and he chooses to sell the stock, Nigel would:
- Receive profit upon selling them
- Receive revenue from selling them
- Receive capital gain upon selling them
- None of the above (Correct answer)
Correct answer: None of the above
Common shares, sometimes referred to as stock, are a sort of equity security that Nigel owns and indicate an ownership position in the company. In the event that he sold his common shares, he would realize a capital gain.
Question 6: A major agricultural company is worried that the price of their principal commodity, soybeans, may drop before to the fall harvest. How should the firm handle this exposure?
- Hedge by shorting soybean futures contracts
- Hedge by taking a log positioning soybean futures
- Hedge by writing put options on contracts that require delivery of soybeans (Correct answer)
- Hedge by placing cash in the bank to cover the difference in price
Correct answer: Hedge by writing put options on contracts that require delivery of soybeans
The farming company must safeguard itself against a decline in soybean prices. Therefore, the company ought to short (or sell) soybean futures contracts in order to lock in the price of their soybean crop.
Question 7: Many players in the market employ margin accounts. Which two of the following selections best exemplify the features of margin accounts? <br> <br> 1. Interest must be paid by the borrower to the dealer <br> 2. Dealer can only sell the securities on margin with the client's approval <br> 3. Margin calls must be covered immediately <br> 4. Margin reduces market risk for the client
- 2 and 3 only
- 1 and 4 only (Correct answer)
- 2 and 4 only
- 1 and 3 only
Correct answer: 1 and 4 only
In a margin account, the customer receives a loan from the broker to buy stocks or other financial items. The purchased assets and cash serve as collateral for the loan in the account, which has a recurring interest rate. Because a client is borrowing money through a margin account, the investor has the added risk of having to fund the account when margin calls come.
Question 8: Which theory, presuming that different market participants have distinct preferences when buying or selling bonds, explains the yield curve's shape?
- Market expectations theory
- Liquidity preference theory
- Rational expectations theory
- Market segmentation theory (Correct answer)
Correct answer: Market segmentation theory
According to the market segmentation theory, there is no correlation between long-term and short-term interest rates. Additionally, it says that the current interest rates on short-, intermediate-, and long-term bonds should be regarded as distinct products in various debt securities markets. The main results of this theory are that supply and demand dynamics within each market/category of debt security maturities dictate yield curves, and that the yields within one category of maturities cannot be utilized to anticipate the yields within another category. The segmented markets theory is another name for market segmentation theory. It is predicated on the idea that buyers who favor investing in securities with particular durations—short, intermediate, or long term—make up the majority of the market for each segment of bond maturities.
Question 9: Which of the following organizations connects investors and capital users as an intermediary?
- Borrowers
- Brokers
- Investors (Correct answer)
- All of the above
Correct answer: Investors
Brokers, sometimes referred to as investment dealers, serve as middlemen by connecting capital users and investors. Keep in mind that every party involved in a transaction has a dealer who uses the markets to match trades.
Question 10: Except for the following, all of the following assets lose value over time after being acquired by a company:
- Land
- Capital equipment
- Mineral deposits
- Trademarks (Correct answer)
Correct answer: Trademarks
Land, capital equipment, and mineral deposits all lose value over time — equipment depreciates, mineral deposits deplete, and even land can be written down in some cases — whereas trademarks are intangible assets that often have an indefinite useful life and may gain value as a brand strengthens, so they are not systematically amortised. That makes the trademark the exception.
Question 11: Which bond among the following has the lowest likelihood of volatility?
- 10-year GOC bond with a 5% coupon
- 10-year GOC bond with a 10% coupon
- 5-year GOC bond with a 5% coupon
- 5-year GOC bond with a 10% coupon (Correct answer)
Correct answer: 5-year GOC bond with a 10% coupon
Bond price volatility falls as the coupon rate rises and as time to maturity shortens. The 5-year, 10% coupon GOC bond combines the shortest maturity with the highest coupon, giving it the lowest interest-rate sensitivity; the other bonds have longer maturities and/or lower coupons, making their prices more volatile.
Free CSC Volume 2 Questions and Answers
Which monetary policy alternatives should the Bank of Canada select to raise inflation expectations given that inflation is substantially lower than expected?