Investment Industry Overview

Questions and Answers

Which term best describes a financial entity that serves as an intermediary between investors and issuers?

Investment dealer (correct)

Institutional firm

Broker

Robo-advisor

Which type of fund allows investors to buy and sell shares directly from the fund at any time?

Closed-end fund

Open-end fund (correct)

Pension fund

Mutual fund

What is the primary role of a discount broker?

Serves institutional clients only

Provides full-service advisory

Offers trades at reduced commission rates (correct)

Facilitates mergers and acquisitions

In the context of funding, what distinguishes a borrower from a supplier of capital?

Borrowers utilize capital, while suppliers provide capital. Signup and view all the answers

Which organization is primarily responsible for regulating financial markets in Canada?

Canadian Investment Regulatory Organization Signup and view all the answers

What type of company typically issues shares to the public and invests in various securities and assets?

Investment fund Signup and view all the answers

Which financial entity specifically works with clients to automate investment processes?

Robo-advisor Signup and view all the answers

What financial concept relates to the distribution of capital in primary markets?

Primary market distribution Signup and view all the answers

Which is NOT a feature of a closed-end fund?

Investors can redeem shares at NAV Signup and view all the answers

What percentage of pre-tax income is recommended to be saved during working years?

10% to 20% Signup and view all the answers

What is a common percentage that Canadians are believed to need of their income at retirement, according to the rule of thumb?

70% Signup and view all the answers

Which of the following is NOT considered a source of retirement income for Canadians?

Profit sharing from existing debts Signup and view all the answers

What is the approximate debt-to-income level in Canada currently as stated?

172% Signup and view all the answers

What trend has been observed regarding Canadian savings rates in recent studies?

Fallen below 6% Signup and view all the answers

Which of the following contributes to household debt levels in Canada?

Consumer debt and mortgage debt Signup and view all the answers

What primary role do market makers play in the secondary market?

They provide liquidity and stabilize prices. Signup and view all the answers

Which entity in Canada is responsible for clearing securities transactions?

CDS Clearing and Depository Services Inc. Signup and view all the answers

What is the advantage of the central clearing system in securities trading?

It simplifies the netting process for credit or debit positions. Signup and view all the answers

Who primarily participates in the central clearing and settlement system?

Banks, investment dealers, and trust companies Signup and view all the answers

What is one of the functions of investment dealers in the securities market?

To act as market makers by taking positions in stocks Signup and view all the answers

What does the term 'netting' refer to in the context of the central clearing system?

A method to summarize and offset trades between members Signup and view all the answers

Which of the following best describes the role of CDS in the clearing process?

It provides a reliable clearing service without being an intermediary. Signup and view all the answers

During a trading day, how do exchange members typically manage settlements?

Through a central clearing system avoiding individual settlements Signup and view all the answers

Why is the liquidity added by market makers important for the primary market?

It guarantees that new buyers can sell their holdings easily. Signup and view all the answers

What is a significant characteristic of over-the-counter trades in relation to CDS?

They are reported to CDS by system participants. Signup and view all the answers

What is the primary role of a financial intermediary?

To channel funds between lenders and borrowers. Signup and view all the answers

How does a company typically raise capital through financial intermediaries?

By issuing securities to the public. Signup and view all the answers

What is a direct role a financial intermediary can perform?

Helping companies issue stocks and sell them. Signup and view all the answers

What happens to investors who buy stocks when the company's value increases?

They can sell their stocks to earn a profit. Signup and view all the answers

What is one way financial intermediaries contribute to economic development?

By facilitating investments back into the business. Signup and view all the answers

Which of the following best describes the relationship between investors and financial intermediaries?

Investors purchase stocks through intermediaries to transfer money to companies. Signup and view all the answers

What is a potential profit for financial intermediaries during securities issuance?

Transaction fees charged to investors. Signup and view all the answers

What is one common misconception about financial intermediaries?

They have a limited role in promoting economic development. Signup and view all the answers

What might happen if a firm fails to perform well post-capital expansion?

The stock value may decrease, affecting investor profitability. Signup and view all the answers

What is the primary source of revenue for Schedule II banks in Canada?

Retail banking and electronic financial services Signup and view all the answers

Which of the following best describes Schedule III banks in Canada?

They are federally-regulated foreign bank branches authorized to conduct banking business. Signup and view all the answers

How do Schedule II banks provide insurance for deposits?

Via deposit insurance offered by the CDIC Signup and view all the answers

What role do foreign-owned banks play in the Canadian banking system?

They act as a conduit for foreign capital investment in Canada. Signup and view all the answers

Which types of services do credit unions and caisses populaires offer?

A wide variety of banking services including deposits, lending, and mutual funds Signup and view all the answers

Which of these is NOT a common operational focus for Schedule I banks in comparison to Schedule II banks?

Corporate and institutional finance Signup and view all the answers

What is the main advantage of the spread between the two sets of interest rates for banks?

It covers operational costs and provides profit margins. Signup and view all the answers

Which banks are examples of Schedule II banks in Canada?

UBS Bank (Canada) and Citibank Canada Signup and view all the answers

What type of banking services do Schedule III banks prioritize?

Investment banking and corporate finance Signup and view all the answers

What does the term 'appropriations for loan losses' signify for banks?

Reserving funds for expected defaults on loans Signup and view all the answers

Study Notes

Financial Intermediaries

Financial intermediaries, like banks, connect suppliers and users of capital by borrowing from investors and lending to borrowers.
Borrowers may include individuals seeking loans or businesses raising funds through securities.
Investment dealers facilitate capital raising by companies through the process of issuing stocks to investors.

Role of Investment Dealers

Investment dealers assist companies in issuing securities and selling them to investors.
They earn profits from facilitating transactions and trading from their own accounts to enhance market liquidity.

Clearing and Settlement System

Canada’s central clearing system, operated by CDS Clearing and Depository Services Inc., handles daily settlement of securities trades.
CDSX is the facility used for clearing equity and debt trades, including cross-border transactions.
Participants include banks, investment dealers, and trust companies, which rely on netting to manage credit and debit positions efficiently.

Types of Banks in Canada

Schedule II Banks: Federally-regulated foreign bank subsidiaries that can accept deposits eligible for CDIC insurance; they focus on retail banking.
- Examples: AMEX Bank of Canada, Citibank Canada, UBS Bank (Canada).
Schedule III Banks: Federally-regulated foreign bank branches focusing on corporate and institutional finance; authorized under the Bank Act.
- Examples: Barclays Bank, Comerica Bank.

Role of Credit Unions and Caisses Populaires

Offer diverse services including deposit-taking, lending, mortgages, mutual funds, insurance, and credit/debit card services to businesses and consumers.

Retirement Income Sources for Canadians

Common sources include employer pension plans, Canada Pension Plan, Quebec Pension Plan, savings, and asset liquidation.
Canadians typically should aim for 70% of pre-retirement income, with a recommendation to save 10%-20% during working years.
Recent studies indicate Canadian savings are below 6%.

Household Debt Levels

Household debt comprises mortgage debt and consumer debt (credit cards, loans, unpaid bills).
Debt-to-income ratios have stabilized at approximately 172%, higher than the 100% in 2000, raising concerns about debt servicing with potential interest rate increases.
Managing debt effectively is crucial as rising interest rates can lead to increased stress and risk of bankruptcies.

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Description

This quiz covers key concepts in the Canadian investment industry. Explore various types of funds, regulatory organizations, and market operations that shape capital markets in Canada.