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Questions and Answers
What must a dealer member obtain from a client before transacting business on a margin account?
What must a dealer member obtain from a client before transacting business on a margin account?
- A detailed financial analysis
- An investment risk disclosure statement
- An authorized Margin Account Agreement Form (correct)
- A personal credit report
What is the minimum margin required for equity securities listed on a recognized exchange priced at $1.75?
What is the minimum margin required for equity securities listed on a recognized exchange priced at $1.75?
- 40% of market value
- 60% of market value (correct)
- 50% of market value
- 70% of market value
Which organization regulates the amount of credit that dealer members may extend to clients for the purchase of securities?
Which organization regulates the amount of credit that dealer members may extend to clients for the purchase of securities?
- Financial Services Regulatory Authority (FSRA)
- Canadian Stock Exchange (CSE)
- Canadian Investment Regulatory Organization (CIRO) (correct)
- Securities Commission of Canada (SCC)
What margin percentage is generally required for securities trading at $1.50 to $1.74?
What margin percentage is generally required for securities trading at $1.50 to $1.74?
How much margin is required for securities priced under $1.50?
How much margin is required for securities priced under $1.50?
What is the minimum margin required for securities eligible for reduced margin?
What is the minimum margin required for securities eligible for reduced margin?
Which sector primarily invests in the short-term market?
Which sector primarily invests in the short-term market?
What action does the Canadian Investment Regulatory Organization (CIRO) take to ensure compliance among dealer members regarding margin accounts?
What action does the Canadian Investment Regulatory Organization (CIRO) take to ensure compliance among dealer members regarding margin accounts?
What does the market segmentation theory suggest influences the yield curve?
What does the market segmentation theory suggest influences the yield curve?
Which statement best summarizes a common limitation placed by many firms on margin positions?
Which statement best summarizes a common limitation placed by many firms on margin positions?
Which of the following theories explains all types of yield curves?
Which of the following theories explains all types of yield curves?
Which of the following categories is NOT mentioned as part of the long margin accounts?
Which of the following categories is NOT mentioned as part of the long margin accounts?
How do bond prices typically react to increases in interest rates?
How do bond prices typically react to increases in interest rates?
What is the primary purpose of the minimum margin requirements established by CIRO?
What is the primary purpose of the minimum margin requirements established by CIRO?
What feature of a bond significantly impacts its reaction to interest rate changes?
What feature of a bond significantly impacts its reaction to interest rate changes?
What is primarily used to evaluate the pricing of bonds in a market?
What is primarily used to evaluate the pricing of bonds in a market?
What is the margin requirement for a client who buys 1,000 shares of ABC Company at $25 per share with a loan rate of 50%?
What is the margin requirement for a client who buys 1,000 shares of ABC Company at $25 per share with a loan rate of 50%?
If the price of ABC stock increases to $29, what is the value of the client's investment?
If the price of ABC stock increases to $29, what is the value of the client's investment?
In Scenario 1, when the price of ABC stock declines to $22, what is the new value of the investment?
In Scenario 1, when the price of ABC stock declines to $22, what is the new value of the investment?
What percentage of the total cost is put up by the firm as a loan in the initial purchase of ABC shares?
What percentage of the total cost is put up by the firm as a loan in the initial purchase of ABC shares?
If a client puts up $12,500 in cash to buy ABC shares, how much is the total cost of the purchase?
If a client puts up $12,500 in cash to buy ABC shares, how much is the total cost of the purchase?
Assuming commissions are excluded, how much equity does the client have in their ABC shares initially?
Assuming commissions are excluded, how much equity does the client have in their ABC shares initially?
What is a defining characteristic of a cash account compared to a margin account?
What is a defining characteristic of a cash account compared to a margin account?
If the price of ABC stock falls to $22, what is the loss incurred by the client on the investment?
If the price of ABC stock falls to $22, what is the loss incurred by the client on the investment?
What will happen to the client's margin if the price of ABC stock falls significantly?
What will happen to the client's margin if the price of ABC stock falls significantly?
Which of the following is true regarding the settlement date for Government of Canada Treasury bills?
Which of the following is true regarding the settlement date for Government of Canada Treasury bills?
If the margin requirement is calculated as the difference between the purchase price and the loan amount, what does this imply for fluctuating stock prices?
If the margin requirement is calculated as the difference between the purchase price and the loan amount, what does this imply for fluctuating stock prices?
What is a margin account primarily used for?
What is a margin account primarily used for?
How does a loan rate of 50% affect the initial cash investment for purchasing ABC shares?
How does a loan rate of 50% affect the initial cash investment for purchasing ABC shares?
How does a long position differ from a short position?
How does a long position differ from a short position?
Which of the following best describes the action required to close a long position?
Which of the following best describes the action required to close a long position?
What condition must be satisfied when an investment is made in a cash account?
What condition must be satisfied when an investment is made in a cash account?
In what scenario would a client likely use a margin account?
In what scenario would a client likely use a margin account?
What does the term 'short selling' refer to?
What does the term 'short selling' refer to?
What is one potential risk of trading on margin?
What is one potential risk of trading on margin?
What is the primary method used to determine the value of a bond?
What is the primary method used to determine the value of a bond?
If $1,000 is the future value and the interest rate is 5%, what investment today results in this future sum?
If $1,000 is the future value and the interest rate is 5%, what investment today results in this future sum?
Which equation correctly represents the relationship between present value, interest rate, and future value?
Which equation correctly represents the relationship between present value, interest rate, and future value?
Why is the present value of a bond generally less than its future value?
Why is the present value of a bond generally less than its future value?
What is the essential component of the cash flow for a typical bond?
What is the essential component of the cash flow for a typical bond?
In the example given, what would be the future value if $952.38 is invested at a 5% interest rate?
In the example given, what would be the future value if $952.38 is invested at a 5% interest rate?
Which of the following is not a characteristic of fixed-income securities?
Which of the following is not a characteristic of fixed-income securities?
When evaluating the price of a fixed-income security, which factor is crucial?
When evaluating the price of a fixed-income security, which factor is crucial?
What approach would typically be inaccurate when determining the price of a bond?
What approach would typically be inaccurate when determining the price of a bond?
What is the expected outcome of investing in a bond today?
What is the expected outcome of investing in a bond today?
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Study Notes
Cash Accounts vs. Margin Accounts
- Cash Accounts: Require full payment for purchases or full delivery for sales by the settlement date.
- Settlement Dates:
- Government of Canada Treasury bills: same day as the transaction.
- All other securities: one business day after the transaction.
- Margin Accounts: Allow clients to buy or sell securities on partial credit, where the investment dealer provides a loan for the remaining balance, charging interest.
Long and Short Positions
- Long Position: Represents actual ownership of a security.
- Short Position: Created by selling a security that the investor does not own.
- Example: Buying shares initiates a long position, while selling those shares in the market closes it.
Long Margin Accounts
- Credit extended to clients for security purchases is regulated by the Canadian Investment Regulatory Organization (CIRO).
- Minimum Margin Requirements:
- Equities at $2.00 and over: 50% margin
- Equities at $1.75 to $1.99: 60% margin
- Equities at $1.50 to $1.74: 80% margin
- Equities under $1.50: 100% margin (no loan value)
- Reduced margin stocks: 30% margin
- Dealer members may impose stricter requirements, often not allowing margin positions on stocks under $3.
Margin Calculations Example
- Buying 1,000 shares of ABC Company at $25/share:
- Total cost: $25,000
- Client puts up 50% margin: $12,500 (loaned amount matches client's contribution).
Bond Pricing and Yield Calculation
- Present Value: The amount paid today for a guaranteed future cash sum.
- Example: To receive $1,000 in one year at a 5% interest rate, the present value would be approximately $952.38.
- Cash flows for bonds include regular coupon payments and the principal at maturity.
Market Segmentation Theory
- Explains yield curves based on supply and demand for bonds of various terms.
- Key players (e.g., banks and insurance companies) influence the market segmentation.
Yield Curve Theories
- Expectations Theory: Relates future interest rates and current yield curves.
- Liquidity Preference Theory: Investors prefer liquidity and will demand higher yields for longer maturities.
- Market Segmentation Theory: Each market segment has its own supply and demand influences.
Impact of Interest Rates on Bond Prices
- Bond prices react inversely to changes in interest rates.
- Individual bond features (maturity, coupon rate, yield) determine reactions to interest rate fluctuations.
- Accurate bond pricing involves present value calculations with continuous reinvestment strategies.
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