1. Which of the following best describes a 'strip bond' in the Canadian fixed-income market?
- A. A bond where the coupon payments and principal repayment have been separated and sold as individual zero-coupon securities ✓
- B. A bond issued by a provincial government with interest payments stripped of withholding tax
- C. A floating-rate bond whose coupon is periodically adjusted by stripping the spread from a benchmark rate
- D. A convertible bond from which the conversion feature has been removed and sold separately
A strip bond (or stripped bond) is created when a dealer separates ('strips') the coupon payments from the principal of a conventional bond and sells each cash flow as a distinct zero-coupon security. Buyers receive no periodic interest; instead they purchase at a discount and receive face value at maturity. The other options describe products or features that do not exist under this definition.
2. A client holds 500 exchange-traded fund (ETF) units on the Toronto Stock Exchange. Which statement about how ETF pricing differs from a conventional mutual fund is CORRECT?
- A. An ETF is priced intraday on the exchange and can trade at a premium or discount to its net asset value (NAV) ✓
- B. An ETF is priced once daily at closing NAV, just like a conventional mutual fund
- C. An ETF must always trade at exactly its NAV because of mandatory redemption requirements
- D. An ETF price is set by the fund manager each morning before the market opens
ETFs trade on a stock exchange throughout the trading day at market prices determined by supply and demand. Because of this continuous trading, the market price can deviate from the fund's NAV, resulting in a premium or discount. This contrasts with conventional mutual funds, which are priced once per day at NAV after the market closes. Authorized participants and the arbitrage mechanism keep the gap small but it is not eliminated.
3. Which risk is MOST associated with a long-term Government of Canada bond compared with a short-term Government of Canada Treasury Bill?
- A. Credit risk, because longer maturities increase the chance of government default
- B. Liquidity risk, because long-term bonds trade less frequently than T-Bills
- C. Interest rate risk, because the longer duration makes the bond price more sensitive to changes in interest rates ✓
- D. Reinvestment risk only, because T-Bills carry no reinvestment risk
Duration measures a bond's price sensitivity to interest rate changes; the longer the term to maturity, the greater the duration and therefore the greater the price volatility for a given change in rates. Government of Canada bonds carry negligible credit risk. Both instruments are highly liquid in the Canadian market. Reinvestment risk exists for both securities but is not the primary distinguishing risk between them.
4. A Canadian investor buys a call option on 100 shares of a TSX-listed stock with a strike price of CAD 50 and pays a premium of CAD 3 per share. What is the investor's maximum possible loss?
- A. CAD 300, equal to the total premium paid ✓
- B. CAD 5,000, equal to the cost of buying the shares at the strike price
- C. Unlimited, because option losses are theoretically infinite
- D. CAD 4,700, equal to the strike price minus the premium multiplied by 100 shares
The buyer of a call option has a limited downside. The worst case is that the option expires worthless, and the entire premium is lost. With a premium of CAD 3 per share on 100 shares, the maximum loss is CAD 300. Unlimited loss potential applies to the seller (writer) of a naked call, not the buyer.
5. Which of the following is a key characteristic that distinguishes a debenture from a secured corporate bond?
- A. A debenture is backed only by the general creditworthiness of the issuer, not by specific pledged assets ✓
- B. A debenture pays interest at a floating rate, whereas a secured bond always pays a fixed rate
- C. A debenture is issued exclusively by the federal government, whereas secured bonds are issued by corporations
- D. A debenture is a short-term instrument maturing in less than one year, whereas a secured bond has a term exceeding one year
A debenture is an unsecured debt instrument; holders have a general claim against the issuer's assets in the event of default but are not backed by a specific pledged asset or collateral pool. Secured bonds, by contrast, are backed by identifiable assets (e.g., equipment, real property). Interest rate type (fixed vs. floating) and term are independent of whether the bond is secured or unsecured.
6. A guaranteed investment certificate (GIC) purchased from a Canadian deposit-taking institution that is a member of the Canada Deposit Insurance Corporation (CDIC) is eligible for deposit protection. Up to what CDIC coverage limit does protection apply per depositor per insured category for eligible deposits?
- A. CAD 100,000 per depositor per insured category ✓
- B. CAD 250,000 per depositor in total across all accounts
- C. CAD 500,000 per depositor per insured category
- D. CAD 1,000,000 per depositor in total across all institutions
CDIC protects eligible deposits held at member institutions up to CAD 100,000 per depositor per insured category, at each member institution. Eligible deposits can include GICs/term deposits, and current CDIC rules no longer limit coverage to deposits with an original term of five years or less or only Canadian-dollar deposits.
7. Which statement BEST describes a 'principal-protected note' (PPN)?
- A. A structured product that guarantees return of the initial investment at maturity while providing potential upside linked to an underlying asset or index ✓
- B. A government-guaranteed bond whose coupon rate is indexed to the Consumer Price Index
- C. A short-term money market instrument issued at a discount and redeemed at face value
- D. A mutual fund that invests exclusively in investment-grade fixed-income securities to protect capital
A principal-protected note (PPN) is a structured product that contractually guarantees repayment of 100% of the invested principal at maturity (subject to the creditworthiness of the issuer), while offering a variable return linked to the performance of an underlying reference (e.g., equity index, commodity). The guarantee is not government-backed; it is the issuer's promise. PPNs are distinct from inflation-linked bonds, T-Bills, or capital-preservation mutual funds.
8. An investor is considering a real estate investment trust (REIT) listed on the TSX. Which of the following is an accurate statement about Canadian REITs?
- A. Canadian REITs are structured as trusts and are required to distribute a substantial portion of their taxable income to unitholders to maintain their tax-advantaged status ✓
- B. Canadian REITs must invest at least 80% of assets in residential real estate and are prohibited from owning commercial properties
- C. Distributions from a publicly listed Canadian REIT are always treated as capital gains in the hands of the unitholder
- D. Canadian REITs are regulated exclusively by CIRO and are exempt from provincial securities legislation
Canadian REITs are income trusts structured to flow income through to unitholders; to qualify for the mutual fund trust tax treatment under the Income Tax Act (Canada), they must distribute substantially all taxable income annually, avoiding entity-level tax. They may invest in various real estate types (residential, commercial, industrial). Distributions can consist of income, return of capital, and capital gains — not exclusively capital gains. REITs are subject to provincial securities legislation in addition to CIRO oversight.
9. Under what scenario would the holder of a put option on a TSX-listed stock be MOST likely to exercise the option?
- A. When the market price of the stock falls significantly below the option's strike price ✓
- B. When the market price of the stock rises significantly above the option's strike price
- C. When the stock pays a large special dividend before expiry
- D. When implied volatility of the stock decreases sharply
A put option gives the holder the right to sell the underlying stock at the strike price. It is profitable to exercise when the stock's market price is below the strike price (i.e., the option is 'in the money'), because the holder can sell shares at the higher strike price. When the stock price rises above the strike, the put is out of the money and would not be exercised. Dividends and changes in implied volatility affect option pricing but are not the trigger for exercising a put.
10. Which of the following products would MOST expose a retail investor to counterparty risk in addition to market risk?
- A. An over-the-counter (OTC) forward contract on Canadian dollars ✓
- B. A Government of Canada marketable bond
- C. An exchange-traded equity index ETF listed on the TSX
- D. A GIC held at a CDIC member institution within the CDIC coverage limits
An OTC forward contract is a bilateral derivative contract, so the investor faces both market risk from movements in the underlying currency and counterparty risk if the other party fails to perform. A Government of Canada bond has market and interest-rate risk but very low issuer credit risk and is not primarily a counterparty-risk product. A TSX-listed ETF has market risk, with counterparty exposure generally mitigated by exchange, custody, and settlement arrangements. A GIC at a CDIC member institution within applicable CDIC limits is protected against member-institution failure up to the insured limit.