Capital Market, Investment Capital & Country Risk
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Questions and Answers

Which of the following financial products is BEST suited for sophisticated investors due to its value being derived from an underlying instrument?

  • Mutual Funds
  • Investment Certificates
  • Preferred Shares
  • Derivatives (correct)

Which of the following BEST describes managed products (investment funds)?

  • Products whose value is derived from an underlying instrument.
  • Pools of capital gathered from investors to buy securities according to a specific investment mandate. (correct)
  • Newly issued securities bought and sold by companies and governments to investors.
  • Financially engineered products with characteristics of debt, equity, and investment funds.

An investor purchases shares of a company in the primary market. How does the money flow in this transaction?

  • From the investor to the issuing company. (correct)
  • From the issuing company to the investor.
  • From the investor to another investor.
  • It flows from the investment dealer to the auction market.

In which market do investors trade securities that have already been issued by companies and governments?

<p>Secondary Market (C)</p> Signup and view all the answers

Which market exclusively involves the trade of short-term fixed-income securities with a maturity of one year or less?

<p>Money Market (A)</p> Signup and view all the answers

In an auction market, how are securities bought and sold?

<p>Through investment dealers acting as agents who execute trades on behalf of their clients. (B)</p> Signup and view all the answers

What condition MUST be met for a trade to be executed in an auction market?

<p>The best bid must be equal to the best offer. (C)</p> Signup and view all the answers

Which of the following is an example of a structured product?

<p>Principal Protected Notes (A)</p> Signup and view all the answers

A client wants to trade futures and options listed in Canada. Which exchange is MOST appropriate for this type of transaction?

<p>Montreal Exchange (D)</p> Signup and view all the answers

Which of the following BEST describes the role of market makers in dealer markets?

<p>They act as principals, holding an inventory of securities to buy from sellers and sell to buyers. (C)</p> Signup and view all the answers

A company is looking to list its shares on an exchange that focuses on emerging companies. Which exchange would be MOST suitable?

<p>Canadian Securities Exchange (D)</p> Signup and view all the answers

In dealer markets, how are trades typically facilitated between investment dealers?

<p>Through the computer systems of inter-dealer brokers. (D)</p> Signup and view all the answers

Which of the following is a key characteristic of the OTC derivatives market?

<p>Contracts can be custom-designed by the buyer and seller. (C)</p> Signup and view all the answers

Which market is best suited for trading the majority of bonds and debentures?

<p>Dealer Markets (A)</p> Signup and view all the answers

Which of the following best describes the primary investment need for individuals as users of capital?

<p>Financing large purchases like houses, cars, and major appliances. (B)</p> Signup and view all the answers

What is a key difference between retail investors and institutional investors regarding their investment activities?

<p>Retail investors trade securities for personal accounts, while institutional investors trade in large quantities. (C)</p> Signup and view all the answers

An investment dealer holds an inventory of securities. In which type of market is the investment dealer MOST likely operating?

<p>A dealer market (D)</p> Signup and view all the answers

How do businesses primarily address their capital needs for operations, maintenance, and expansion?

<p>By generating capital internally from retained profits. (D)</p> Signup and view all the answers

Which of the following is NOT a characteristic of dealer markets compared to auction markets?

<p>Centralized trading location. (B)</p> Signup and view all the answers

Which factor is most important when evaluating investment opportunities?

<p>Returns on investment compared to risk. (C)</p> Signup and view all the answers

An individual is considering purchasing a rental property. According to the text, what is the individual acting as in this scenario?

<p>A user of capital financing a large purchase. (B)</p> Signup and view all the answers

A pension fund decides to increase its stake in a tech company. How would this action be classified?

<p>Institutional investment for long-term growth. (C)</p> Signup and view all the answers

A tech startup is deciding whether to use its profits to buy new equipment or to distribute it to shareholders. Which capital management aspect does this decision directly relate to?

<p>Business use of retained profits. (C)</p> Signup and view all the answers

Suppose a country has a low percentage of skilled labor force. How might it affect investment opportunities?

<p>Decrease returns on investment due to lower productivity. (D)</p> Signup and view all the answers

Which of the following best describes the 'mobility' characteristic of investment capital?

<p>The capacity of capital to be easily transferred and reallocated to different investment opportunities. (D)</p> Signup and view all the answers

Which scenario exemplifies a direct investment, as opposed to an indirect investment?

<p>A corporation using its funds to build a new manufacturing facility. (D)</p> Signup and view all the answers

A country with high inflation, unstable monetary policy, and frequent foreign exchange fluctuations is LEAST likely demonstrate which characteristic to investment capital?

<p>Profitability (D)</p> Signup and view all the answers

Which of the following country risk factors would MOST significantly impact foreign investment decisions?

<p>Government policies which hinder trade and investment. (A)</p> Signup and view all the answers

A stable political environment is MOST likely characterized by:

<p>A predictable legal system and consistent enforcement of contracts. (A)</p> Signup and view all the answers

How does a country's fiscal policy MOST directly influence investment decisions?

<p>Through taxation levels, government spending initiatives, and incentives for savings. (A)</p> Signup and view all the answers

A country's central bank implements a contractionary monetary policy. What is the MOST likely direct effect on the investment climate?

<p>Higher borrowing costs and reduced investment in capital projects. (A)</p> Signup and view all the answers

Which of the following scenarios indicates a country with strong money supply management?

<p>The central bank independently manages inflation through transparent and predictable policies. (B)</p> Signup and view all the answers

Which of the following is a key function that Alternative Trading Systems (ATSs) are NOT permitted to perform?

<p>Listing securities themselves. (D)</p> Signup and view all the answers

What regulatory requirement must an Alternative Trading System (ATS) meet?

<p>Registration as an investment dealer and membership in a self-regulatory organization. (B)</p> Signup and view all the answers

Which of the following best describes the primary function of CanDeal?

<p>An ATS that provides institutional investors access to government securities and money market instruments. (C)</p> Signup and view all the answers

What is the main function of the CanPX system in the Canadian fixed-income market?

<p>To offer a composite display of real-time bid and offer quotations for government of Canada bonds and treasury bills. (A)</p> Signup and view all the answers

What distinguishes CBID & CBID Institutional from other fixed-income electronic marketplaces?

<p>It operates two distinct marketplaces: one for retail and one for institutional investors. (A)</p> Signup and view all the answers

Which of the following securities are typically traded through dealer markets in Canada?

<p>Virtually all Bond and Money Market securities. (B)</p> Signup and view all the answers

What is the role of MarketAxess in the fixed-income market?

<p>It provides market data and a trading platform with access to multi-dealer competitive pricing for corporate bonds. (D)</p> Signup and view all the answers

How does CanPX gather data to display real-time bid and offer quotations?

<p>By aggregating digital feeds directly from participating dealers. (A)</p> Signup and view all the answers

Which sector does Foreign Direct Investment (FDI) typically concentrate in?

<p>Manufacturing, petroleum, natural gas, mining, and smelting (D)</p> Signup and view all the answers

How do capital users, like companies, typically meet their financial needs beyond FDI?

<p>Borrowing from financial intermediaries and raising capital in securities markets (D)</p> Signup and view all the answers

In the context of securities, what role do governments play in public markets?

<p>Governments issue securities directly or guarantee debt of their corporations. (D)</p> Signup and view all the answers

What is the key defining characteristic of financial instruments in the form of securities?

<p>They are formal, legal documents outlining the rights and obligations of buyers and sellers. (A)</p> Signup and view all the answers

What fundamental promise is made by the issuer of fixed-income securities to the investor?

<p>To repay the loan at maturity and pay interest during the term. (B)</p> Signup and view all the answers

Which of the following is an example of a fixed-income security?

<p>Treasury Bill (T-Bill) (A)</p> Signup and view all the answers

What does the ownership of equity securities (stocks or shares) represent in a company?

<p>A form of ownership stake in the company that issued them. (B)</p> Signup and view all the answers

Which of the following is an example of an equity security?

<p>Common Stock (A)</p> Signup and view all the answers

Flashcards

Capital

A fancy word for money and assets used for investments.

Mobility of Capital

The ability of capital to move and settle where favorable conditions exist.

Investment Sensitivity

Capital reacts to changes in the economic environment.

Scarcity of Capital

The limited availability of capital resources.

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Indirect Investment

Investing through other means, like stocks or bonds.

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Political Environment

The state of a country's political stability and conflicts.

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Economic Trends

Indicators like GDP growth and inflation rate that show economic health.

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Monetary Policy

Management of a nation's money supply to promote economic stability.

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Investment Opportunities

Potential avenues for generating returns on capital while managing risk.

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Labor Force Skill Level

The percentage of workers who have skills and productivity.

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Sources of Capital

Places or means from where capital is obtained, e.g., loans or retained profits.

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Individuals as Capital Users

People who need capital for large personal purchases like homes and cars.

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Retail Investors

Individual clients buying and selling securities for personal accounts.

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Institutional Investors

Organizations investing in large quantities of securities, e.g., pension and mutual funds.

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Businesses as Capital Users

Organizations that require large sums of capital for operations and growth.

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Retained Profits

Earnings that businesses keep to reinvest rather than distribute as dividends.

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Foreign Direct Investment (FDI)

Investment made by a company or individual in one country in business interests in another country.

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Fixed-Income Securities

Financial instruments that pay fixed interest over time, returning principal at maturity.

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Debt Securities

Financial instruments where the issuer owes the holder a debt and is obliged to pay interest.

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Equity Securities

Financial instruments that represent an ownership stake in a company.

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Treasury Bills (T-Bills)

Short-term government securities that mature in one year or less.

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Bonds

Fixed-income securities that are long-term loans from investors to borrowers.

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Capital Suppliers

Individuals or institutions that provide capital to businesses or projects in exchange for returns.

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Capital Users

Entities like companies that use capital from suppliers to fund their operations.

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Preferred Shares

A class of shares that typically have preferential rights over common shares regarding dividends and asset liquidation.

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Derivatives

Financial products whose value is based on an underlying asset like stocks or indices.

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Options

A type of derivative that gives the buyer the right, but not the obligation, to buy or sell an asset at a specified price.

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Primary Market

The market where newly issued securities are bought and sold directly from the issuing entity.

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Secondary Market

The market where investors trade securities that have already been issued by companies and governments.

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Auction Markets

Markets where securities are bought and sold through competitive bidding by investors.

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Mutual Funds

Investment funds that pool capital from multiple investors to purchase securities in line with a specific strategy.

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Structured Products

Financial instruments engineered to meet specific investment needs, combining features of debt and equity.

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Alternative Trading Systems (ATS)

ATS are electronic marketplaces for automated trade matching and execution.

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Registration Requirement of ATS

An ATS must register as an investment dealer and join a self-regulatory organization.

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Functions of ATS vs. Traditional Exchanges

ATS can trade listed securities but cannot list them like traditional exchanges.

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CanDeal

A joint venture providing access to government securities and money market instruments for institutional investors.

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CBID & CBID Institutional

An ATS with two marketplaces: one for retail and one for institutional trading.

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MarketAxess

An ATS that offers market data and trading platforms for corporate bonds with competitive pricing.

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CanPX

A system providing real-time bid and offer quotations for Canada’s government bonds and treasury bills.

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Fixed-Income Electronic Systems

Marketplaces in Canada for trading bond and money market securities, predominantly electronic.

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TSX Alpha Exchange

Offers trading in securities on TSX and TSX Venture Exchange.

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Montreal Exchange

Trades financial and equity futures and options in Canada.

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ICENGX Canada Exchange

Provides electronic trading and clearing for natural gas and electricity markets.

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Canadian Securities Exchange

Lists equities of emerging companies in Canada.

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Dealer Markets

A network where banks and dealers trade securities, not centralized like auction markets.

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Market Makers

Investment dealers who provide liquidity by quoting bids and offers.

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OTC Derivatives Market

A market dominated by large institutions, offering customized derivatives trading.

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Unlisted Markets

Securities that are not traded on organized exchanges like auction markets.

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Study Notes

Capital Market

  • The capital market is a complex system encompassing various financial markets.
  • It involves the buying and selling of securities (stocks, bonds, etc.).
  • Key components include the primary and secondary markets.

Investment Capital

  • Investment capital refers to funds used for investments in assets.
  • Characteristics of capital include mobility, sensitivity to environmental factors, and scarcity.
  • These conditions allow investment capital to flow to where conditions are favorable.

Country Risk Factors

  • Political environment: Political instability (internal or external conflict) impacts investment decisions.
  • Economic trends: GDP growth, inflation rate, and economic activity influence investment choices.
  • Fiscal policy: Tax rates, government spending, and government incentives regarding investment and savings are important considerations.
  • Monetary policy: The stability of a nation's money supply management, including foreign exchange rates, influences investment.
  • Investment opportunities: Return on investment compared to the associated risk is a critical factor.
  • Labor force: The skill and productivity level of a nation's labor force are important in determining the investment potential.

Suppliers and Users of Investment Capital

  • Suppliers: Retail investors, institutional investors (pension funds, mutual funds), and foreign investors provide capital.
  • Users: Individuals need capital for major purchases, businesses require capital for operations and expansion, and governments need capital for projects and operations.

Financial Instruments

  • Financial instruments are formal and legal documents outlining the rights and obligations of investors (suppliers) and issuers (users) of capital.
  • Types of Financial Instruments:
    • Fixed-income securities (debt securities): Treasury bills, bonds; Formalized promise to repay a loan.
    • Equity securities (stocks, shares): Common stock, preferred stock; Form of ownership stake in a company.
    • Derivatives: Products whose value is derived from other instruments. Examples include options and forwards.
    • Managed products (investment funds): Mutual funds, exchange-traded funds (ETFs); Pools of capital invested according to a defined mandate.
    • Structured products; Investment instruments with debt, equity, and investment fund characteristics.

Financial Markets

  • Capital markets comprise individual markets like stock markets, bond markets, and money markets.
  • Primary market: Issuance of new securities by companies or government entities. Money flows to issuing entities.
  • Secondary market: Trading of existing securities between investors. Money flows between investors.
  • Auction markets: Securities are traded by matching buyers' bids with sellers' offers.
  • Dealer markets (OTC): Trading through a network of dealers who act as principals. Not centralized, less visible.

Exchanges

  • Stock exchanges: Centralized auction markets where buyers and sellers of securities trade under established supply and demand rules. Liquidity is essential.
  • Common and preferred shares, rights and warrants, exchange-traded funds (ETFs), income trusts, etc. are traded on Canadian exchanges.
  • Important Canadian examples of exchanges and alternative trading systems include the Toronto Stock Exchange (TSX), TSX Venture Exchange, The Montreal Exchange, ICENGX Canada Exchange, and Canadian Securities Exchange.
  • Alternative trading systems (ATS): Electronic platforms that automate trading but cannot list securities themselves.

Bid-Ask Spread

  • Bid price - highest price a buyer is willing to pay.
  • Ask price (offer) - lowest price a seller will accept.
  • Bid-ask spread is the difference between the ask and bid price.

Dealer Markets (OTC)

  • Dealer Markets, also known as over-the-counter (OTC) markets, facilitate trading in securities outside of centralized exchanges, typically through a network of dealers.
  • Dealer markets involve:
    • Dealers acting as market makers.
    • Trades executed through inter-dealer broker systems.
    • Unlisted securities traded without being listed on organized exchanges.
    • Examples: Many bonds and debentures trade in OTC markets.

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Description

Overview of the capital market and investment capital, including country risk factors. Key aspects covered are political environment, economic trends, fiscal and monetary policy.

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