“FOR SURE” QUESTIONS

Chapter One

1. Direct vs. Indirect Investment… “Which of the following is an example of direct

investment?” *1-2]

2. Principal (or primary) investment objectives: Safety, Income, Growth. [HINT: Remember
the acronym SIG+… “Which of the following is NOT ONE of the principal investment
objectives? [1-6]

3. Secondary investment objectives: Marketability/Liquidity and Tax Minimization… “Which

of the follow phrases contains the secondary investment objectives?” *1-6]

4. Which level of government uses which instruments… Federal uses T-bills, marketable long
and short-term bonds, and Canada Savings Bonds and Canada Premium Bonds… Provinces
use T-bills, bonds, and guaranteed bonds for provincial agencies… Municipalities (read:
Cities) uniquely use instalment or serial debentures. [1-8]

5. The role of the Bourse de Montreal in Canada: “Where do all financial and equity futures
and options trade in Canada?” – ANSWER: MONTREAL EXCHANGE. The role of the Toronto
Stock Exchange (TSX): senior equities, some debt instruments, and ETFs. The role of the TSX
Venture Exchange: junior securities and a few debenture issues. The role of the Winnipeg
Commodity Exchange (WCE): agricultural futures and options.
[1-9]

6. Characteristics that define a liquid market. “Which of the follow is NOT a condition for a
liquid market?” has been a question on past exams. This requires you to understand that
frequent sales, narrow price spreads between bids and offers, and small price fluctuations
from sale to sale are the three conditions for a liquid market. [1-13]

7. Dealer markets and the role of the market makers. “In the OTC market, the responsibility of
the market maker is to… ANSWER: MAKE A MARKET. *1-18]

8. Industry regulation – government… “In Canada, the regulation of the securities industry is a
provincial responsibility” versus the role of OSFI.
[1-43]

9. SROs… including CIPF *1-44], the IDA [1-47+ “mission is to foster efficient capital markets”
and MFDA. [1-49]

10. The process of Arbitration: what does an arbitrator do, what are the limits, how does the
process begin, etc. [1-50]

11. The role of the Clearing System. The question may be along the line of: WHAT BENEFITS
ARE PROVIDED BY THE CLEARING SYSTEM? ANSWER: REDUCES THE NUMBER OF
CERTIFICATES AND AMOUNT OF CASH THAT CHANGES HANDS AND HELPS FIRMS MANAGE
THEIR SETTLEMENT PROCESS.
FINALLY, I WOULD HAVE A “HEADS-UP” FOR:

CHINESE WALLS [1-33] which are the controls that institutions like banks and investment
dealers have in place in order to inhibit information sharing between different lines of the
same business

DEMUTUALIZATION [1-38] which is the process by which insurance companies that were
previously owned by policyholders (that is, if you held an insurance policy with Manulife you
used to automatically be a part owner) reorganize such that the companies are owned by
shareholders

These are “new” points which were either not mentioned or did not have the same emphasis in the
previous version of the Canadian Securities Course material.
“FOR SURE” QUESTIONS

Chapter Two

1. Market equilibrium [2-3] and the inter-action between supply and demand.

2. Microeconomics versus macroeconomics – what kinds of questions does each discipline

address. [2-2, 2-5]

3. Definition of Gross Domestic Product (GDP)… “What measures the value of all goods and
services produced in the country in a year?” ANSWER: GDP OR the ways it is measured OR
the contrast between GDP and GNP
[2-5]

4. There should be at least one question on the phases of the Business Cycle. They seem to be
phrased in the following way – that is, excerpted from the book… “Falling demand and
excess capacity curtail the ability of firms to raise prices. Inflation rates follow, triggering a
bond rally…” ANSWER: TROUGH. [2-10]

5. Identifying recessions and the definition of a soft landing. Be careful to distinguish between
the popular definition of a recession – two consecutive quarters of declining real GDP and
the Statistics Canada… depth, duration and diffusion of the decline. *2-11]

6. Leading, lagging, co-incident indicators… There should be two questions. Identify the most
important ones in each category. The most important leading indicators are Housing Starts,
manufacturers’ new orders, and commodity prices. The most important co-incident are GDP
and retail sales. The lagging indicators: Inflation and unemployment. [2-12/13]

7. What determines economic growth? [2-15]

8. Interest rates… How they affect the economy? What determines interest rates? Types of
questions: “Which effect is likely if interest rates are increased?” or “If this occurred, would
interest rates go up, stay the same, be unchanged?” *2-17/18]

9. Money and inflation:

NOMINAL INT. RATES = REAL INT. RATES + INFLATION

10. Definition of the Consumer Price Index (CPI) and what it measures… “What measures the
change in the cost of living in Canada?” ANSWER: CPI/CONSUMER PRICE INDEX or the
question may be along the lines of the costs of inflation [2-21] or the question may be long
the lines of what causes inflation. Known the definitions of output gap, cost-push, demand-
pull. [2-22, 2-23]

11. There will be at least one question on unemployment and the types of unemployment. It
may ask you to differentiate between structural and cyclical. As well, previous tests have
asked for the various definitions of the minimal unemployment rate – there are a number of
italicized phrases on 2-27 that you should memorize. KEY TERMS: working age population,
participation rate, unemployment rate, cyclical unemployment, structural unemployment,
frictional unemployment

12. There should be a question about the Balance of Payments. It will either take the form that
tests the knowledge that a surplus in one account (Current or Capital) means an equal and
 off-setting deficit in the other, or it will test your knowledge that the most important
component of the Current Account is merchandise trade. [2-27]

13. There should be one question about the Exchange Rate. If the Canadian dollar goes up in
value, it is good for Canadian consumers because it makes foreign goods cheaper, but bad
for Canadian exporters because our products become more expensive. And vice-versa [2-
30/31]

14. There should be one question on Fiscal Policy, most likely what would be appropriate policy
under certain economic condition. To speed up the economy the government can cut taxes
or increase spending and to slow down the economy is can raise taxes or decrease spending.
Automatic stabilizers such as Employment Insurance are critical. REMEMBER:
GOVERNMENT ATTEMPTS TO BE COUNTER-CYLICAL.

15. There should be one question on Monetary Policy. In the past it has taken the form of
functions of the Bank of Canada, the objectives of Monetary Policy, SPRAs (to relieve
undesired upward pressure on overnight financing rates) and SRAs (to relieved undesired
downward pressure on overnight financing rates).

FINALLY, I WOULD HAVE A HEADS-UP FOR:

potential output [2-9} what the economy is capable of producing if all land, labour and
capital is utilized
output gap [2-22] the difference between the actual level of output and the potential level
of output
Phillips curve [2-23} which shows the relationship between inflation and unemployment
Monetarists [2-35] and Keynesian Economics [2-35]
“FOR SURE” QUESTIONS

Chapter Three

1. There should be a question that tests your knowledge of the competitive tender, non-
competitive tender, and negotiated offering methods of bringing new corporate issues to
the market. Government issues are generally distributed through a COMPETITIVE TENDER,
Corporate issues through a NEGOTIATED OFFERING. [3-2]

2. There could be a question on PRIVATE PLACEMENTS versus PUBLIC OFFERINGS. It could

take the form of testing knowledge of who gets access to private placement – Sophisticated
investors & institutional clients – or the requirements for disclosure – they are much lower.
[3-6]

3. There could be a question that tests the distinction between initial public offering, secondary
offering and secondary trading. An initial public offering or IPO is the first time a company
allows the public to shares in its ownership. A secondary offering is the second or third or
fourth time that a company issues treasury shares to the public. Secondary trading
describes what occurs when individual investors sell outstanding securities to each other. [3-
7]

4. There could be up to two questions on the terminology that surrounds offerings under the
prospectus system. First, make sure that you understand the process. Then familiarize
yourself with terms like preliminary prospectus/red herring prospectus, waiting period,
greensheet and final prospectus. The key phrase that describes what is required in a
prospectus: Full, true and plain disclosure of all material facts. [3-10]

5. Simplified or Short Form Prospectus Distribution (SFPD) system. Only senior reporting
issuers (this means companies who are already subject to continuous disclosure, that is,
already trading on an exchange) can use this system. You should be familiar with the criteria
[3-12] and understand why the SFPD system is one of the reasons that the bought deal has
become more frequent. [3-12]

6. Advantages/Disadvantages of Listing [3-18,19] and/or what is included in the Listing

Application [3-19].

7. There will be a question about Temporary Interruptions of Trading. It should take the form
of a hypothetical – “If the CEO of a company steps down unexpectedly in the middle of the
day, the exchange might invoke a…” with the correct answer: HALT IN TRADING. Note: Be
clear on the terminology: Delayed Opening, Halt in Trading, and Suspension of Trading. [3-
20]

8. There will be a question on Cancelling a Listing (Delisting). Familiarize yourself with the
conditions – and be aware that they are not all negatives – they are clearly listed on [3-21].

9. Know Your Client Rule. Remember that the New Account Application Form is the first step
in complying with this regulation. [3-23]

10. The three key unethical practices to be aware of are BUCKETING, HIGH SALING or WINDOW
DRESSING, FRONT RUNNING. On previous examinations, BUCKETING was always tested. [3-
26]
 11. The purchasers’ statutory rights exist for securities purchased under the prospectus
requirements. This question should take the form of a hypothetical. Be careful to
distinguish between the right of withdrawal where the purchaser has 48 hours to withdraw
from the deal, no questions asked, and the right of rescission where there is no time limit
but there must be a misrepresentation in the prospectus. [3-27]

12. Proxies and Proxy Solicitation. The only people who can vote at a shareholders’ meeting are
shareholders and valid proxy owners – a past question. [3-29]

13. Takeover bids. The threshold for provincially incorporated companies is 20% of outstanding
shares, 10% for federally incorporated companies. As well, a directors’ circular must be sent
to security holders of the target companies within 10 days of the bid. In this document, the
Board of Directors must recommend whether to accept or reject the takeover bid. [3-30]

14. Insiders. Who is and who is not an insider? What is the time frame under which insiders
must report? [3-32]

FINALLY, I WOULD HAVE A HEADS-UP FOR:

National Registration Database [3-22] – a web-based system used by investment dealers and
employees to file registration forms electronically

Universal Market Integrity Rules [3-24] a common set of rules intended to promote investor
confidence
 "FOR SURE” QUESTIONS

CHAPTER FOUR

1. There could be a question on the types of business structures: sole proprietorship, general
partnership and limited partnership, and private versus public corporations. In the past,
the trick question has been on the number of shareholders – a maximum of 50. [4-1,3]

2. There could be a question on who does and who does not qualify to be a Director. [4-5]

3. There should be one question on the distinction between authorized, issued, outstanding
shares and public float. Market capitalization, which refers to the number of shares times
the market price of the shares, is new content. [4-7,8]

4. There should be a question on the advantages/disadvantages of incorporation. NOTE: The

principal advantage is LIMITED LIABILITY which means that you can only lose what you
invest and not a dollar more. [4-9,10]

5. There should be a question on the general form of the Balance Sheet:

ASSETS = LIABILITIES AND SHAREHOLDERS' EQUITY [4-11]

6. There should be a question on Inventory Methods: Average Cost, (FIFO) First-in-first-out,

and (LIFO) Last-in-first-out. A couple of notes: LIFO is acceptable for accounting but not for
income tax purposes in Canada. As well, in periods of increasing prices FIFO produces the
higher inventory and higher profit figures and LIFO produces the lower inventory and lower
profit figures. Remember: LIFO (starts with "L") leads to "L"ower inventory and profit. [4-
12]

7. There should be one question on DEPLETION or AMORTIZATION Be clear that WASTING

ASSETS are depleted and INTANGIBLE ASSETS are amortized. GOODWILL is the most
common intangible asset.

8. There will be one question on Depreciation – including a numerical example. A machine is

worth $10 million originally. Its salvage value is $2 million and it has five years of useful life.
Therefore, EACH year you will depreciate $10 million - $2 million = $1.6 million
per year.
5 years

This means that in the second year, the depreciation amount would be $1.6 million and the
ACCUMULATED depreciation would be $3.2 million.
9. CAPITALIZING refers to the recording of an expenditure as an asset rather than an expense.
This was ALWAYS a question on past examinations. [4-15]

10. Understand the concept of MINORITY INTEREST and that it only appears on consolidated
balance sheets. [4-18]

11. Differentiate between the elements found in the Shareholders' Equity Section of the Balance
Sheet: Share Capital, Contributed Surplus, RETAINED EARNINGS, and Foreign Currency
Translation Adjustment. [4-19]

12. Know the different accounting methods depending on whether the parent company owns
over 50%/consolidation method, 20% to 50%/equity accounting method, or under
20%/cost method of a subsidiary company… (4-24)
 13. There should be a question about the Earnings Statement – either what it shows or its
structure. [4-20]

14. "What are the three headings on a Cash Flow Statement?" [ANSWER: Operating, Financing,
and Investing activities…+ Understand the role of the Cash Flow Statement in bridging the
gap between the Balance Sheet and Earnings Statement. [4-27]

15. Auditors – whom they represent (shareholders) and what they do (review the Financial
Statements to verify their truth) and GAAP (Generally Accepted Accounting Practices) – the
principles and practices used. [4-29]

FINALLY, I WOULD HAVE A HEADS-UP FOR:

Both common shares and preferred shares form the company’s capital stock or equity capital [4-
7]
 FOR SURE QUESTIONS

CHAPTER FIVE

1. Familiarize yourself with the basic bond terms: maturity date, maturity value, trust deed,
interest, coupon rate, denomination, par/discount/ premium, term to maturity… *5-1,2]

2. There should be a question on the distinction between liquid, negotiable, and marketable
bonds. It may take the form of a specific bond – such as a CSB, for example. [5-3]

3. Features and Provisions: Callable/redeemable, Sinking Funds versus Purchase Funds,

Extendible and Retractable. Each of these features is deemed to be an advantage to either
the issuing company or the investor. Be clear which is which and how they will affect the
yield of a bond. REMEMBER: EVERYTHING THAT IS FAVOURABLE TO AN INVESTOR WILL
MEAN A LOWER YIELD, EVERYTHING ELSE BEING EQUAL. [5-4,5,6]

4. Protective provisions. Don’t memorize the difference between them – just know that
prohibition of prior lien, negative pledge provision, closed-end mortgage, and after-
acquired clause are the most common protective provisions. [5-8]

5. Treasury bills. In the past, the question revolved around the following paragraph: “Treasury
bills do not pay interest. Instead, they are sold at a discount (below par) and mature at 100.
The difference between the issue price and par at maturity represents the return on the
investment, instead of interest. Under the Income Tax Act, this return is taxable as income,
not as a capital gain.” In other words, they do not pay interest, but the gain is taxed at a
100% inclusion rate – as if it were interest! [5-11]

6. Canada Savings Bonds – the unique features – and contrasts with CPBs. [5-12]

7. Instalment debentures or serial debentures – uniquely issued by municipalities, usually they

are non-callable. [5-16]

8. Collateral trust bonds and equipment trust certificates: What kind of company issues
them? [5-17]
9. Convertible debentures and the forced conversion clause. The key benefit to the company
and the reason it issues convertible debentures is because it lowers the interest it has to
pay. The advantage for the investor is that they are always convertible into common shares
and provide the added benefit of capital gains. [5-18,19]

10. Strip bonds or zero coupon bonds. [5-21]

11. Foreign bonds – a definition. A foreign bond is when a Canadian company issues in
AMERICA through an AMERICAN UNDERWRITER denominated in AMERICAN currency. A
foreign bond is when an American company issues in JAPAN through a JAPANESE
UNDERWRITER denominated in JAPANESE currency. [5-22]

12. Reading a bond quote. The “trick” question on past exams is to note that the “spread”
between the bid and ask is fifty (50) basis points. The reason for this: 100 basis points = 1%.
[5-24]

13. PRESENT VALUE. This will be a numerical question and an easy point…. Calculate the
present value of the second coupon payment of a 6% bond assuming a discount rate of 5%.
First, remember that most bonds pay semi-annually, which means that the second coupon
payment would gross $30 ($60/2). When we discuss present value, we are simply asking
how much is that $30 that you will receive in a year worth to you today? So we “discount”
the $30/1.0252 = $28.55 [5-28]

14. CURRENT YIELD. This will be a numerical question and an easy point… What is the current
yield of a 6% coupon bond assuming that it is trading at 104? Even though the bond costs us
104, owning it will give us $6 of interest income in a given year: The coupon rate is always
based on the PAR amount, not the market value. Thus the CURRENT yield is $6/$104 =
5.77%. [5-28]

15. TREASURY BILL YIELD. This will be a numerical question and an easy... If you purchase a T-
bill at 98 with 255 days to maturity, what is its yield? Clearly it will return 2 and to earn this
money will require an initial investment of 98. The return is earned in less than a year, thus
we must adjust the return of 2/98 accordingly…
100 - price x 365 x 100 = 02 x 365 x 100 = 2.92%
price term 98 255
16. APPROXIMATE YIELD TO MATURITY. Numerical question, easy… This tests your ability to
understand that when bonds trade at a discount (premium) the investor will receive a capital
gain (loss) in addition to the interest payments. Imagine that you buy a bond at 96 with a 5%
coupon with four years to maturity. Each year you will earn $5 in interest income. As well,
you’ll make $4 in capital gains over 4 years or about $1 per year. On average, you’re
investing 98. Why 98? The original investment amount is 96 and in four years the market
value of your asset will be 100… thus we can say that, on average, you’re tying up 98. The
formula:

Interest Income +/- Capital Gain (Loss)/Years to Maturity = 5 + 4/4

(Purchase Price + Maturity Value)/2 (96 + 100)/2

17. NOMINAL RATE = REAL RATE + INFLATION. [5-31]

18. There should be a question that tests your understanding of what affects the term structure
of interest rates or the yield curve. This is just a graphic representation of interest rates and
time to maturity of bonds of similar risk. There are three “theories”: Expectations Theory,
Liquidity Preference Theory, and Market Segmentation Theory. [5-31,32]

19. Factors that affect bond volatility: Long term bonds are more volatile than short term bonds
and low coupon bonds are more volatile than high coupon bonds. This used to be tested by
giving you a series of bonds and asking you which was the least or most volatile. [5-33]

20. Duration. Interest rates and bond prices have an INVERSE relationship: As interest rates go
up, the price of outstanding bonds go down – and vica-versa. Duration measures the
sensitivity of bonds to a 1% change in interest rates. In other words, a bond with a duration
of 5 will increase in value by 5% if interest rates drop by 1% and that same bond will fall in
value by 5% if interest rates increase by 1%. [5-36]

21. Benefit of bond switching – just memorize the terms: Net Yield Improvement, Term
Extension or Reduction, Improvement in Credit, and Portfolio Diversification. [5-38]

22. Bond Settlement Periods – summarized nicely in the table. [5-40]

 23. ACCRUED INTEREST: This will be a numerical question and an easy… This tests your
knowledge of what happens when one investor sells a bond to another investor. The deal
the company makes is to pay the interest every six months to the registered owner. If an
investor owns a bond and sells it, say, two months after receiving the last interest payment,
the buying investor will receive the entire coupon payment as if he/she held it for six
months. In order to be compensated for holding the bond for two months, the selling
investor is paid accrued interest by the buying investor. The relevant time period is from the
last coupon date to the bond’s settlement date. For example, let’s say that a $100,000 face
st
value bond with a 6% coupon, maturity October 1 2010 is sold with the trading settling on
th st
July 13 . Because bonds pay semi-annually, the two interest dates are October 1 and April
st st
1 . So the seller would have been paid interest to April 1 by the company. That means, the
seller did not receive interest payments for 29 days in April, 31 days in May, 30 days in June
and 13 days in April – a total of 103 days. Annually, the bond pays $6,000 in interest or
$16.44 per day ($6,000/365). $16.44 x 103 = $1,693.15 which would be the accrued interest
owed by the buyer of the bond to the seller of the bond. [5-41]

FINALLY, I WOULD HAVE A HEADS-UP FOR:

Preferred securities or preferred debentures [5-22]

GICs – there is far more information about these products than in the previous version [5-23]

Reinvestment risk [5-35] which is the risk that if interest rates fall then you will not be able to
reinvest the coupon payments and get as high an interest rate as you may have anticipated

Bond indexes [5-44]. There was no mention of these in the previous CSI material. Be familiar
with their three uses and the names of the index providers in Canada
 FOR SURE QUESTIONS

CHAPTER SIX

1. There will be at least one question (maybe two or even three) around dividend policy and
the important dates: cum-dividend, ex-dividend, record date and pay date. First, the Board
of Directors DECLARE dividends if there is enough money in the company. Dividends are
NOT a legal requirement as opposed to interest payments on bonds and debentures which
MUST be paid. Dividends are generally paid quarterly – that is, every three months. When
the Board of Directors declare a dividend date, they specify a record date. To be a
shareholder of record, one must either own or buy those shares three business days before
the record date. At that time, the shares are trading cum dividend or “with dividend”. The
next day, that is, two business days before the record date, the shares trade ex dividend,
that is, without the dividend. An investor will actually receive the money in his/her account
on the pay date. [6-4,5]

2. Restricted shares. There are certain shares that receive a full share of the profits but have
restrictions with respect to voting rights. The three categories: Non-voting, subordinate
voting, restricted voting are spelled out quite clearly in the text. [6-6]

3. There will be a question (or two) on the tax treatment. Capital gains are taxed at an
inclusion rate of 50%. The dividend tax credit is received from dividends paid by taxable
Canadian companies. Tax is paid by individuals who receive dividends from non-Canadian
companies. You may be tested on the taxable amount of the dividend, gross-up, or
dividend tax credit. If an investor receives $200 in dividends from her company, it is grossed
up by 25% or $50. Then the taxable amount of the dividend is $250. A tax credit of 13.33%
is applied to the $250. In effect it means that the government is saying that for all intents
and purposes you have paid $33.33 in taxes. Then the entire $250 is added to the taxpayer’s
income and she is taxed at the appropriate rate. [6-8]

4. Stock splits. Companies split their shares to increase the number of shares outstanding by
the same proportion that they decrease the price. In other words, if a company split its
stock 3 for 1 and before the split there were 10,000,000 shares @ $15, after the split there
would be 30,000,000 shares at $5. NOTE: The market capitalization does NOT change. [6-9]

5. Stock consolidations. The opposite of a stock split in that the number of shares is reduced
in the same proportion as the price is increased. If a company had 10,000,000 shares
outstanding at $.15 and it announced a 1 for 10 consolidation, there would be 1,000,000
shares at $1.50. [6-10]
6. There could be a question on what makes a preferred share “preferred”. It is preference
with respect to receiving dividends and preference as to assets in case of the company’s
break up. Preferred shares occupy a position BETWEEN debt and common shares. [6-12]

7. There will definitely be a question on cumulative vs. non-cumulative preferred shares and
the concept of arrears. In the past it has taken this very tricky form… “A cumulative
preferred share has not paid its $1 dividend for two consecutive periods. Before the
common shareholders receive a dividend, how much would a preferred shareholder have to
receive?” The correct answer would be $3… the $2 in arrears and the NEXT dividend. *6-13]

8. There should be a question on Special Protective Provisions of Preferred Shares. NOTE: The
concepts: Callable, Retractable, Sinking Fund, Purchase Fund are the same for Preferred
 Shares as they are for Bonds. Take a moment to familiarize yourself with Voting Privileges
and Special Protective Provisions. [6-14,15]

9. There should be a question on the types of preferreds, worded in the form of, everything
else being equal, which preferred share would yield the highest or lowest? Remember – all
features that favour the investor such as cumulative, convertible, extendible, retractable,
participating mean a lower yield and everything that favours the company – non-cumulative,
callable or redeemable, mean a higher yield is necessary. [ 6-17,18]

10. Be prepared for a question on conversion cost premiums and payback periods. Remember:
Investors prefer low premiums and short payback periods. [6-18]

11. Pre-tax yield for a retractable preferred share. This is identical to the approximate yield to
maturity formula we encountered in the bond section. [6-20]

12. There could be a theoretical question on the difference between cash and margin accounts
and/or settlement dates. Familiarize yourself with the settlement dates for the various
securities. [6-23,24]

13/14 There will be two questions on margin. Margin answers the question: What percentage
must the investor pay for a given security? You must familiarize yourself with the margin
rates on Table 6.2 [6-24]. From there, the steps are simple: [6-25]

1) Calculate the total value of the purchase

2) Calculate the loan value
3) Calculate the margin required = 1) – 2)
4) Re-calculate the loan value after the price change
5) Take 4) + 3) and compare it to 1). If greater, a surplus. If lower, a deficit
An example should make this clear. An investor purchases 2,000 shares of ABC security at
$1.60 per share. What is the margin required? Then after the margin is deposited, assume
that the share increases in price to $1.95. What is the margin surplus or deficit?

1) Total value of the purchase: 2,000 x $1.60 = $3,200

2) Loan value: 20% x 1.60 x 2,000 = $640
3) Margin required: $3,200 - $640 = $2,560
4) Loan value after price change: 40% x $1.95 x 2,000 = $1,560
5) $1,560 + $2,560 = $3,200 + $920… $920 is the margin surplus

15. There will likely be one question on short selling – the logic behind it, the time limit on short
sales (there are NO time limits on short sales), the necessity of declaring a short sales, or the
dangers inherent in it. [6-27,29]

16/17 There will one question on margin for short sales and a profit/loss question. THEY WILL NOT
MAKE YOU RE-CALCULATE THE MARGIN ASSUMING A PRICE CHANGE!

An investor short-sold 1,000 shares of an option-eligible security (or a security eligible for
reduced margin) at $15. What is the margin required? What is the profit or loss if the
position is off-set at $12?

1) Minimum account balance required: 130% x 1,000 x $15 = $19,500

2) Proceeds from short sale: $15,000
3) Minimum margin required: 1) – 2) = $4,500
 Profit/Loss: [SALE PRICE – PURCHASE PRICE] X #SHARES
[$15 - $12] X 1,000 = $3,000 PROFIT

18. Buy and Sell Orders. THIS WAS THE MOST HEAVILY TESTED AREA IN THE PREVIOUS VERSION
OF THE EXAMINATION. [6-33]

19. The Preferential Trading Rule. [6-35]

20. Indexes and averages: What they’re used for… the difference between them. *6-35]

21. Canadian Market Indexes, including criteria. [6-36,39]

22. U.S. Market Indexes, focusing on the Dow Jones Industrial Average. [6-40]

23. International indexes and averages. [6-44]

FINALLY, I WOULD HAVE A HEADS-UP FOR:

Dollar cost averaging [6-7] is one of the benefits that an investor can obtain from dividend re-
investment plans

Board lots [6-11] and odd lots [6-10]. Shares usually trade in even increments of 100 shares – a
board lot. Anything less than that is an odd lot
 FOR SURE QUESTIONS

CHAPTER SEVEN

1. Familiarize yourself with the differences between Over-the-Counter Derivatives, Exchange-

Traded Derivatives, paying special attention to Exchange-Traded Futures and Exchange-
Traded Options. [7-2], [7-6]

2. Know how to read an options quote. [7-4]

3. Know how to read a futures quote. [7-5]

4. Look at Table 7.6. In past examinations, there was always a question that was worded in the
following way: “An investor writes 100 call contracts. This investor has…” POINT #1: Each
option contract controls 100 shares. Therefore 100 option contract controls 10,000 shares.
POINT #2: Writing is the same as selling. POINT #3: Sellers receive the option premium and
therefore assume the OBLIGATION. [7-12]

5. Understand the distinction between in-the-money, at-the-money and out-of-the-money.

Be prepared to calculate which option has the most intrinsic value, as well as profit/loss
break-even type calculations, and the distinction between time value and intrinsic value. [7-
13]

6. There may be more than one question on basic option strategies. [7-14… 22+

7. There may be a question on basic future strategies. [7-25]

8. There may be a question on the use of futures and options by mutual fund companies and
portfolio managers. [7-27]

9. Understand the similarities and differences between rights and warrants. [7-30]

10. Be able to calculate the value of rights during the ex-rights and cum-rights period, as well as
calculate the number of new shares that would be created with a rights offering and the
total capital that a company would raise. [7-32]

FINALLY, I WOULD HAVE A HEADS-UP FOR:

Initial margin, maintenance margin and marking-to-market are terms related to necessary
deposits for futures trading

Piggy back warrants are warrants that are received upon the exercise of the initial warrants