volume 1 - chapter 00 - table of contents

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Canadian Securities CourseVolume 1



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ISBN: 978-1-77176-098-0

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Copyright © 2015 by Canadian Securities Institute



© CANADIAN SECURITIES INSTI TUTE (2015) i

Course Introduction

Welcome to the Canadian Securities Course (CSC)!

In beginning this course, you are taking an important first step toward a comprehensive

financial education. You will be able to apply the knowledge you acquire in this course

to an exciting career in the financial services industry, or you can use it simply to make

informed financial decisions and maximize your investment potential.

The CSC is recognized as an industry benchmark. It covers a diverse range of topics,including financial markets, financial instruments, and financial intermediaries. The course

content reflects the ever-changing nature of the securities industry. Ten years ago,

for example, exchange-traded funds, principal protected notes, and hedge funds were

barely covered in the CSC, because they were of little significance. Today, these types of

securities are treated in-depth in the CSC, because they have come to play a vital role in

the financial landscape.

The dynamic nature of the industry is a compelling reason to take the CSC course,

whether you aspire to a career, are already working in the financial services industry

or merely want to enhance your investing knowledge. Your challenge is to thoroughly

understand the material so you can apply it in the workplace, discuss key concepts with

your financial advisor, or use your knowledge to make your own investment decisions.Our challenge is to make the content easy to learn. We created various course

components for this purpose, and we highly recommend that you use them all. They

include the textbook, online learning activities, post-test questions, discussion boards,

Frequently Asked Questions (FAQs), and the CSC Check product.



COURSE INTRODUCTION iii

© CANADIAN SECURITIES INSTI TUTE (2015)

Tell Us How We’re Doing!

Although we make every effort to ensure that what you are learning is accurate, practical, and well written, we recognize that there is always room for improvement. The course is updatedregularly, so please let us know what you think. You can submit comments, suggestions orcomplaints to [email protected] .

This edition of the Canadian Securities Course (CSC) textbook was prepared in the Fall of 2014.The CSC textbook is updated and revised regularly to better reflect the rapidly changing financialservices industry. We thank those students and industry representatives who helped with therevision process, either through their suggestions or by providing or verifying information forthe book.

What You’ll Learn

The CSC covers the three central elements of the Canadian securities industry—financialproducts, financial markets, and the role of financial intermediaries. Intermediaries includeInvestment Advisors, financial planners, and financial advisors, among others. Our goal is to help

you understand the marketplace and introduce you to industry terminology and practices.Our journey begins with an introduction to the Canadian securities industry, the regulatorylandscape and the economy. From there, we move to the different types of markets, instrumentsand methods of analysis. The course ends with a look at the many types of structured orfinancially engineered products, taxation, ethics and, finally, the financial planning process.Volume 1 provides the tools and knowledge that you will need to apply to the material inVolume 2.

What Is the Big Picture?

Think of the capital market as the engine of the economy. By this we mean that the capital

market transforms savings into investments, and these investments drive a nation’s growth. Thisvital economic function is based on a simple process—the transfer of money from those who haveit (savers) to those who need it (users).

Capital transfer at its simplest occurs when you deposit money into a bank account. Once youmake a deposit, the bank can lend it to a business that needs funds. For example, the businessmay use borrowed funds to expand their operations or to become a publicly-traded company ona stock exchange. In return, the business pays interest on the borrowed funds, and you receive aportion of that interest for the use of your money.

Of course, the capital transfer process is more sophisticated in our financial markets, especially asthey become increasingly complex.

In essence, the financial markets have evolved to work like this:

• Financial instruments, such as stocks and bonds, formalize the transfer of capital.

• Financial markets provide a forum where capital is transferred in the form of financialinstruments.

• Financial intermediaries, such as Investment Advisors, make the transfer process fasterand easier.



CANADIAN SECURITIES COURSEiv


These three components—instruments, markets, and intermediaries—are the key elements of thesecurities industry. In combination, they facilitate the efficient allocation of capital.

For example, a company needs capital to expand its operations. The company raises capital byissuing financial instruments, such as stocks or bonds, into the market through an investmentdealer. Investors buy the securities through an intermediary such as a financial advisor. In the

process, the investors temporarily transfer their money to the company. In return, they receivesecurities representing claims on the company’s real assets.

If the business does well, it earns a profit. Part of these earnings may be distributed to theinvestors in the form of dividends or interest, depending on the type of security that waspurchased. The price of the security also may rise, yielding a profit or capital gain for the investor when the security is sold in the marketplace.

Investors aren’t the only ones to profit, however. Part of the money earned by the company maybe reinvested in the business, spurring further economic development. Consequently, securitiesinvestments benefit not only the investor and the user of capital, but also the country as a whole.

Key Chapter FeaturesEach chapter includes the following learning features:

Chapter Outlines: The chapter outline lets you know what content will be covered in thechapter and will prepare you for the material you are about to read.

Learning Objectives: The learning objectives help to focus your studies on important topic areas.Be sure to read each objective before you begin a chapter; the objectives specify precisely whatyou are expected to know after reading the chapter and studying the material. To highlight theirimportance, we have linked each objective directly to the chapter’s major headings.

Chapter Openers: Each chapter begins with a short overview of the importance and relevance

of the material to be covered. The openers set the stage and help to increase your motivation bylinking the chapter content to the real world.

Key Terms: Understanding the terminology and jargon of the securities industry is an importantpart of your success in this course. We provide a list of key terms at the start of each chapter.Each key term is boldfaced in the chapter and appears in the glossary included at the end of thetextbook.

Chapter Summaries: Each chapter closes with a concise summary of the material, organized bylearning objective. The summaries will help to reinforce the relationship between the materialand the chapter learning objectives. They also help to suggest areas of weakness that requirefurther study.



COURSE INTRODUCTION v


Your Journey Through the Course

Although each student will develop an individual technique for studying, some may find thefollowing suggestions helpful.

Your registration includes access to online modules that can be used as study guides. They aredesigned to help reinforce the textbook content and assess your knowledge.

Before you read a chapter, we recommend that you log onto the online course and use themodules along with your text. We suggest the following approach:

• Read the Getting Started section and the learning objectives for the chapter.

• Read the chapter in your textbook or the online PDF. Use this first reading to familiarizeyourself with the material. Take notes where necessary, especially if there is a concept youdon’t understand.

• Complete the learning activities associated with each chapter.

• If you have any questions related to the course material, review the online Frequently Asked

Questions section. You may find the answers there.

• Read the chapter slowly a second time. Pay particular attention to those areas you foundchallenging during your first reading.

• Pay attention to the tables, charts, and exhibits. These will help with the practical aspects ofthe material.

• Work through all examples and calculations, making sure that you understand how thecorrect answers were arrived at.

• Complete the post-test for each chapter.

• Read the chapter summary and learning objectives once again to reinforce your learning.

Don’t forget to review the Glossary at the end of the textbook, where the Key Terms from eachchapter are defined. Understanding the terminology and jargon used within the industry is anessential part of this course. We particularly recommend a thorough reading of the Glossary forthose who are new to the material. In fact, the Glossary provides an excellent means to review thematerial and prepare for the exam.



CANADIAN SECURITIES COURSEvi


The Canadian Securities Institute

The Canadian Securities Institute (CSI) has been setting the standard for world-class,life-long education for financial professionals for more than 40 years. Our experience trainingover 700,000 global professionals makes us the preferred partner for individual and corporatefinancial services education internationally. Our expertise extends from securities to mutual

funds, from banking and trust to insurance, from portfolio management to financial planningand wealth management.

CSI is a thought leader whose real world training sets professionals apart in their field, bydeveloping them into leaders who are able to excel in their chosen careers. Our focus onleading educational and ethical standards means that our graduates have met the highest levelof proficiency and certification. We develop course content based on industry trends andcontinuous involvement from our worldwide partners to ensure our graduates are the mostcurrent in every financial sector.

CSI is a partner that works collaboratively with practitioners and industry regulators. This leadsto a higher educational standard in an evolving financial services marketplace. By anticipatingindustry requirements, we are able to develop relevant curriculum and testing for real world

application.

CSI grants designations that have become a true measure of expertise. We focus on state ofthe art industry knowledge that is the recognized standard for regulatory authorities, financialorganizations and associations in Canada and around the globe. Our graduates come with highlyendorsed credentials that are respected throughout the financial services industry.

CSI is valued for its expertise in both course content and program delivery. CSI has establishedprofessional designations in growing specialties such as financial derivatives and wealthmanagement. These are in addition to our respected and established courses and seminars. We’ve also pioneered the use of the Internet as a powerful tool for teaching and professionaldevelopment through online courses and study aids.

CSI leads innovative, lifelong education for career-minded financial professionals. CSI coursesare available on demand in a variety of formats that can be used anywhere and anytime. We arecontinually adapting to changing technology and to the changing needs of learners and theirorganizations.



vii© CANADIAN SECURITIES INSTI TUTE (2015)

ContentsVolume 1

SECTION I

THE CANADIAN INVESTMENT MARKETPLACE

1 The Capital Market ....................................................................1•1

What is Investment Capital? ........................................................................... 1•5

Characteristics of Capital ............................................................................................ 1•5

Why Capital Is Needed ............................................................................................... 1•6

Who are the Sources and Users of Capital? .................................................. 1•6

Sources of Capital ....................................................................................................... 1•7

Users of Capital .......................................................................................................... 1•7

What are the Financial Instruments? ............................................................. 1•9

Financial instruments ................................................................................................. 1•9

Private Equity ........................................................................................................... 1•10

What are the Financial Markets? ...................................................................1•11

Auction Markets in Canada ...................................................................................... 1•12

Dealer Markets ......................................................................................................... 1•14

Other Trading Systems .............................................................................................. 1•16

Fixed-Income Electronic Trading Systems ................................................................. 1•17

Trends in Financial Markets ...................................................................................... 1•18

Summary ...........................................................................................................1•19




CANADIAN SECURITIES COURSE • VOLUME 1viii

2 The Canadian Securities Industry ...............................................2•1

Overview of the Canadian Securities Industry .............................................. 2•5

What Role do Financial Intermediaries Play? ................................................ 2•6

Types of Firms ............................................................................................................ 2•7

Organization within Firms .......................................................................................... 2•8

Investment Dealers and their Principal or Agency Functions .................................... 2•10

The Clearing System................................................................................................. 2•11

What Roles do Banks Play as Financial Intermediaries? .............................2•12

Schedule I Chartered Banks ...................................................................................... 2•12

Schedule II and Schedule III Banks .......................................................................... 2•13

What are Trust Companies, Credit Unions

and Life Insurance Companies? ......................................................................2•14

Trust and Loan Companies ....................................................................................... 2•14

Credit Unions and Caisses Populaires ....................................................................... 2•14

Insurance Companies ............................................................................................... 2•14

What are Investment Funds, Savings Banks, Sales Finance

and Consumer Loan Companies, and Pension Plans? .................................2•16

Summary ...........................................................................................................2•18

3 The Canadian Regulatory Environment ......................................3•1

Who are the Regulators?.................................................................................. 3•5

Federal Regulators ...................................................................................................... 3•5

The Provincial Regulators ........................................................................................... 3•6

The Self-Regulatory Organizations ............................................................................. 3•8

Investor Protection Funds ......................................................................................... 3•10

Role of Arbitration.................................................................................................... 3•13

Ombudsman for Banking Services and Investments .................................................. 3•13




CONTENTS ix

What are the Principles of Securities Legislation? ......................................3•14

Full, True and Plain Disclosure ................................................................................. 3•14

Registration .............................................................................................................. 3•14

The National Registration Database (NRD) ............................................................. 3•16

The Gatekeeper Role ................................................................................................ 3•16

Know Your Client Rule ............................................................................................. 3•17

Client Relationship Model (CRM) ........................................................................... 3•17

What are the Ethics of Trading? .....................................................................3•18

Examples of Unethical Practices ................................................................................ 3•19Prohibited Sales Practices .......................................................................................... 3•19

What are Public Company Disclosures and Investor Rights? .................... 3•20

Continuous Disclosure ............................................................................................. 3•20

Statutory Rights for Investors ................................................................................... 3•21

Proxies and Proxy Solicitation ................................................................................... 3•22

What are Takeover Bids and Insider Trading? ............................................ 3•23

Takeover Bids ........................................................................................................... 3•23

Insider Trading ......................................................................................................... 3•24

Summary .......................................................................................................... 3•26

SECTION II

THE ECONOMY

4 Economic Principles ...................................................................4•1

What is Economics? .......................................................................................... 4•6

Microeconomics and Macroeconomics ....................................................................... 4•6

The Decision Makers .................................................................................................. 4•7

Demand and Supply ................................................................................................... 4•7

How is Economic Growth Measured? ............................................................. 4•9

Measuring Gross Domestic Product ............................................................................ 4•9

Productivity and Determinants of Economic Growth ............................................... 4•11




CANADIAN SECURITIES COURSE • VOLUME 1x

What are the Phases of the Business Cycle? ................................................4•13

Phases of the Business Cycle ..................................................................................... 4•13

Using Economic Indicators ....................................................................................... 4•16

Identifying Recessions ............................................................................................... 4•18

What are the Key Labour Market Indicators? ............................................. 4•20

Labour Market Indicators ......................................................................................... 4•20

Types of Unemployment ........................................................................................... 4•22

What Role do Interest Rates Play? ................................................................ 4•23

Determinants of Interest Rates .................................................................................. 4•24How Interest Rates Affect the Economy ................................................................... 4•24

Expectations and Interest Rates ................................................................................. 4•25

What is the Nature of Money and Inflation? ................................................ 4•25

The Nature of Money ............................................................................................... 4•25

Inflation.................................................................................................................... 4•26

Disinflation .............................................................................................................. 4•29

Deflation .................................................................................................................. 4•30

How does International Economics Impact the Economy? ........................4•31

The Balance of Payments .......................................................................................... 4•31

The Exchange Rate ................................................................................................... 4•32

Summary .......................................................................................................... 4•36

5 Economic Policy .........................................................................5•1

What are the Different Economic Theories? ................................................ 5•5

Rational Expectations Theory ..................................................................................... 5•5

Keynesian Theory ....................................................................................................... 5•5

Monetarist Theory ...................................................................................................... 5•5

Supply-Side Economics .............................................................................................. 5•6

What is Fiscal Policy? ........................................................................................ 5•6

The Federal Budget .................................................................................................... 5•7

How Fiscal Policy Affects the Economy ...................................................................... 5•8




CONTENTS xi

What is the Role of the Bank of Canada? ......................................................5•10

Role of the Bank of Canada ...................................................................................... 5•10

Functions of the Bank of Canada .............................................................................. 5•11

What is Monetary Policy? ................................................................................5•12

Implementing Monetary Policy ................................................................................ 5•13

Open Market Operations.......................................................................................... 5•14

Cash Management Operations.................................................................................. 5•16

What are the Challenges of Government Policy? ........................................5•17

The Consequences of Failed Fiscal Policy .................................................................. 5•18

Summary ...........................................................................................................5•19

SECTION III

INVESTMENT PRODUCTS

6 Fixed-Income Securities: Features and Types ...............................6•1

What is the Fixed-Income Marketplace? ....................................................... 6•6

The Rationale for Issuing Fixed-Income Securities ...................................................... 6•6

What are the Basic Features and Terminology

of Fixed-Income Securities? ............................................................................. 6•7

Basic Terminology ...................................................................................................... 6•7

Describing Bond Features ........................................................................................... 6•8

Liquid Bonds, Negotiable Bonds and Marketable Bonds ............................................ 6•9

Strip Bonds ............................................................................................................... 6•10

Callable Bonds .......................................................................................................... 6•10

Extendible and Retractable Bonds............................................................................. 6•12

Convertible Bonds and Debentures .......................................................................... 6•13

Sinking Funds and Purchase Funds ........................................................................... 6•15

Protective Provisions of Corporate Bonds ................................................................. 6•16

What are Government of Canada Securities? ..............................................6•17

Marketable Bonds ..................................................................................................... 6•17

Treasury Bills ............................................................................................................ 6•18




CANADIAN SECURITIES COURSE • VOLUME 1xii

Canada Savings Bonds .............................................................................................. 6•18

Canada Premium Bonds ........................................................................................... 6•18

Real Return Bonds .................................................................................................... 6•19

What are Provincial and Municipal Government Securities? .....................6•19

Guaranteed Bonds .................................................................................................... 6•20

Provincial Securities .................................................................................................. 6•20

Municipal Securities ................................................................................................. 6•20

What are Corporate Bonds? ...........................................................................6•21

Mortgage Bonds ....................................................................................................... 6•21Collateral Trust Bonds .............................................................................................. 6•22

Equipment Trust Certificates .................................................................................... 6•22

Subordinated Debentures ......................................................................................... 6•22

Floating-Rate Securities ............................................................................................ 6•22

Corporate Notes ....................................................................................................... 6•22

Domestic, Foreign and Eurobonds ............................................................................ 6•22

Preferred Securities ................................................................................................... 6•23

High-Yield Bonds ..................................................................................................... 6•24

What are some Other Fixed-Income Securities in the Marketplace?...... 6•24

Bankers’ Acceptances ................................................................................................ 6•24Commercial Paper .................................................................................................... 6•24

Term Deposits .......................................................................................................... 6•25

Guaranteed Investment Certificates .......................................................................... 6•25

Fixed-Income Mutual Funds and ETFs..................................................................... 6•26

How to Read Bond Quotes and Ratings? ...................................................... 6•26

Summary .......................................................................................................... 6•29

7 Fixed-Income Securities: Pricing and Trading ..............................7•1

How are Price and Yield of a Bond Calculated? ............................................ 7•5

Calculating the Fair Price of a Bond ............................................................................ 7•7

Calculating the Yield on a Treasury Bill .................................................................... 7•11




CONTENTS xiii

Calculating the Current Yield on a Bond .................................................................. 7•12

Calculating the Yield to Maturity on a Bond ............................................................ 7•12

What is the Term Structure of Interest Rates?............................................7•15

The Real Rate of Return ........................................................................................... 7•15

The Yield Curve ....................................................................................................... 7•16

What are the Fundamental Bond Pricing Properties? ................................7•19

The Relationship between Bond Prices and Interest Rates......................................... 7•19

The Impact of Maturity ............................................................................................ 7•20

The Impact of the Coupon ....................................................................................... 7•21The Impact of Yield Changes .................................................................................... 7•22

Duration as a Measure of Bond Price Volatility ......................................................... 7•22

How does Bond Market Trading Work? ....................................................... 7•24

Buying Bonds through an Investment Dealer ........................................................... 7•25

Mechanics of the Trade ............................................................................................. 7•26

Clearing and Settlement ........................................................................................... 7•27

Calculating Accrued Interest ..................................................................................... 7•28

What are Bond Indexes? ................................................................................ 7•30

Canadian Bond Market Indexes ................................................................................ 7•30

Global Indexes .......................................................................................................... 7•31

Summary ...........................................................................................................7•32

8 Equity Securities: Common and Preferred Shares ........................8•1

What are Common Shares? ............................................................................ 8•5

Benefits of Common Share Ownership ....................................................................... 8•5

Capital Appreciation ................................................................................................... 8•6

Dividends ................................................................................................................... 8•6

Voting Privileges ......................................................................................................... 8•9

Tax Treatment ........................................................................................................... 8•10

Stock Splits and Consolidations ................................................................................ 8•12

Reading Stock Quotations ........................................................................................ 8•13




CANADIAN SECURITIES COURSE • VOLUME 1xiv

What are Preferred Shares? ...........................................................................8•14

The Preferred’s Position ............................................................................................ 8•14

Why Companies Issue Preferred Shares ..................................................................... 8•15

Why Investors Buy Preferred Shares .......................................................................... 8•16

Preferred Share Features ............................................................................................ 8•16

Straight Preferreds ..................................................................................................... 8•17

Convertible Preferreds .............................................................................................. 8•18

Retractable Preferreds ............................................................................................... 8•21

Floating-Rate Preferreds ............................................................................................ 8•22

Foreign-Pay Preferreds .............................................................................................. 8•23

Other Types of Preferreds .......................................................................................... 8•23

What are Stock Indexes and Averages? ....................................................... 8•24

Canadian Market Indexes ......................................................................................... 8•25

U.S. Stock Market Indexes ........................................................................................ 8•28

International Market Indexes and Averages ............................................................... 8•29

Summary ...........................................................................................................8•31

9 Equity Securities: Equity Transactions .........................................9•1

What are Cash Accounts? ................................................................................ 9•5

Cash Account Rules .................................................................................................... 9•5

Free Credit Balances ................................................................................................... 9•6

What are Margin Accounts? ............................................................................ 9•6

Long Margin Accounts ............................................................................................... 9•6

Margining Long Positions ........................................................................................... 9•7

What is Short Selling? ...................................................................................... 9•9

How Short Selling is Done ....................................................................................... 9•10

Dangers of Short Selling ........................................................................................... 9•14

How do Trading and Settlement Procedures Work? ..................................9•15

Trading Procedures ................................................................................................... 9•15




CONTENTS xv

How are Securities Bought and Sold? ............................................................9•18

Types of Orders ........................................................................................................ 9•18

Summary .......................................................................................................... 9•23

10 Derivatives ................................................................................10•1

What is a Derivative? ...................................................................................... 10•6

Features Common to All Derivatives ........................................................................ 10•6

Derivative Markets.................................................................................................... 10•7

Exchange-Traded versus OTC Derivatives ................................................................ 10•7

What are the Types of Underlying Assets? .................................................10•10

Commodities .......................................................................................................... 10•10

Financials ................................................................................................................ 10•10

Who are the Users of Derivatives? ..............................................................10•11

Individual Investors ................................................................................................ 10•11

Institutional Investors ............................................................................................. 10•12

Corporations and Businesses ................................................................................... 10•13

Derivative Dealers ................................................................................................... 10•14

What are Options? .........................................................................................10•15Option Exchanges .................................................................................................. 10•20

Option Strategies for Individual and Institutional Investors .................................... 10•21

Option Strategies for Corporations ......................................................................... 10•29

What are Forwards and Futures? ................................................................10•31

Key Terms and Definitions ..................................................................................... 10•31

Futures Exchanges .................................................................................................. 10•33

Futures Strategies for Investors ................................................................................ 10•33

Futures Strategies for Corporations ......................................................................... 10•34

What are Rights and Warrants? .................................................................. 10•36Rights ..................................................................................................................... 10•36

Warrants ................................................................................................................. 10•39

Summary ........................................................................................................ 10•41




CANADIAN SECURITIES COURSE • VOLUME 1xvi

SECTION IV

THE CORPORATION

11 Financing and Listing Securities ................................................11•1

What are the Different Types of Business Structures? ...............................11•6

What are Incorporated Businesses? ..............................................................11•6

Public and Private Corporations ............................................................................... 11•9

The Structure of the Organization .......................................................................... 11•11

How do Governments and Corporations Finance Themselves? .............. 11•13

Investment Dealer Finance Department ................................................................. 11•13

Canadian Government Issues .................................................................................. 11•14

Provincial and Municipal Issues .............................................................................. 11•15

Corporate Issues ..................................................................................................... 11•16

How does the Corporate Financing Process Work? .................................. 11•18

The Dealer’s Advisory Relationship with Corporations ........................................... 11•19

The Method of Offering ......................................................................................... 11•21

The Prospectus ....................................................................................................... 11•22

After-Market Stabilization ...................................................................................... 11•27

What are the Other Methods of Distributing Securities to the Public? .11•29

Junior Company Distributions ............................................................................... 11•29

Options of Treasury Shares and Escrowed Shares .................................................... 11•29

Capital Pool Company Program ............................................................................. 11•29

NEX ....................................................................................................................... 11•30

How does the Listing Process Work? ..........................................................11•30

Advantages and Disadvantages of Listing ................................................................ 11•31

Withdrawing Trading Privileges .............................................................................. 11•32

Summary .........................................................................................................11•34




CONTENTS xvii

12 Corporations and their Financial Statements .............................12•1

What is the Statement of Financial Position? ..............................................12•5

Classification of Assets .............................................................................................. 12•6

Classification of Equity ........................................................................................... 12•10

Classification of Liabilities ...................................................................................... 12•11

What is the Statement of Comprehensive Income?.................................. 12•12

Structure of the Statement of Comprehensive Income ............................................ 12•12

What is the Statement of Changes In Equity? ............................................12•15

What is the Statement of Cash Flows?........................................................12•16

Operating Activities ................................................................................................ 12•17

Financing Activities (items 38 to 41) ...................................................................... 12•18

Investing Activities (items 42 to 44) ........................................................................ 12•18

The Change in Cash Flow (items 45 to 46) ............................................................ 12•18

What is included in the Annual Report? .....................................................12•19

Notes to the Financial Statements ........................................................................... 12•19

The Auditor’s Report .............................................................................................. 12•19

Summary .........................................................................................................12•21

Appendix A – Sample Financial Statements ...............................................12•23

Summary for Volume 1 ....................................................................S•1

Glossary ..........................................................................................G•1

Selected Web Sites .......................................................................Web•1




CANADIAN SECURITIES COURSE • VOLUME 1xviii

Volume 2

SECTION V

INVESTMENT ANALYSIS

13 Fundamental and Technical Analysis .........................................13•1

What are the Methods of Analysis? .............................................................. 13•5

Fundamental Analysis ............................................................................................... 13•5

Technical Analysis ..................................................................................................... 13•5

Market Theories ....................................................................................................... 13•6

What is Fundamental Macroeconomic Analysis? ........................................13•7

The Fiscal Policy Impact ........................................................................................... 13•8

The Monetary Policy Impact .................................................................................... 13•9

The Flow of Funds Impact...................................................................................... 13•10

The Inflation Impact .............................................................................................. 13•10

What is Fundamental Industry Analysis? ....................................................13•11

Classifying Industries by Product or Service ............................................................ 13•11

Classifying Industries by Stage of Growth ............................................................... 13•13

Classifying Industries by Competitive Forces .......................................................... 13•14

Classifying Industries by Stock Characteristics ........................................................ 13•14

What are Fundamental Valuation Models? .................................................13•16

Dividend Discount Model ...................................................................................... 13•16

Using the Price-Earnings Ratio ............................................................................... 13•17

What is Technical Analysis? ..........................................................................13•18

Comparing Technical Analysis to Fundamental Analysis ......................................... 13•19

Commonly Used Tools in Technical Analysis .......................................................... 13•19

Summary .........................................................................................................13•27




CONTENTS xix

14 Company Analysis ....................................................................14•1

What is Company Analysis? ........................................................................... 14•5

Statement of Comprehensive Income Analysis .......................................................... 14•5

Statement of Financial Position Analysis ................................................................... 14•6

Other Features of Company Analysis ........................................................................ 14•8

How are Financial Statements Interpreted? ............................................... 14•9

Trend Analysis ........................................................................................................ 14•10

External Comparisons ............................................................................................. 14•11

What is Financial Ratio Analysis? .................................................................14•12

Liquidity Ratios ...................................................................................................... 14•13

Risk Analysis Ratios ................................................................................................ 14•14

Operating Performance Ratios ................................................................................ 14•19

Value Ratios ............................................................................................................ 14•21

How is Preferred Share Investment Quality Assessed? ............................14•27

Investment Quality Assessment ............................................................................... 14•27

Selecting Preferreds ................................................................................................. 14•28

Summary .........................................................................................................14•29

Appendix A – Company Financial Statements ...........................................14•31

SECTION VI

PORTFOLIO ANALYSIS

15 Introduction to the Portfolio Approach .....................................15•1

What is Risk and Return? ............................................................................... 15•5

Rate of Return .......................................................................................................... 15•6

Risk ........................................................................................................................ 15•10

How are Portfolio Risk and Return Related? ..............................................15•12

Calculating the Rate of Return on a Portfolio ......................................................... 15•12

Measuring Risk in a Portfolio ................................................................................. 15•13

Combining Securities in a Portfolio ........................................................................ 15•14




CANADIAN SECURITIES COURSE • VOLUME 1xx

What is the Portfolio Management Process? .............................................15•17

What are Investment Objectives and Constraints? ...................................15•18

Return and Risk Objectives .................................................................................... 15•18

Investment Objectives............................................................................................. 15•20

Investment Constraints ........................................................................................... 15•22

What is an Investment Policy Statement? ..................................................15•23

Summary .........................................................................................................15•24

16 The Portfolio Management Process ...........................................16•1

How is an Asset Mix Developed? ................................................................... 16•5

The Asset Mix .......................................................................................................... 16•5

Setting the Asset Mix ................................................................................................ 16•7

What are the Portfolio Manager Styles? .....................................................16•11

Equity Manager Styles ............................................................................................ 16•12

Fixed-Income Manager Styles ................................................................................. 16•15

What is Asset Allocation? .............................................................................16•16

Balancing the Asset Classes ..................................................................................... 16•18

Strategic Asset Allocation ........................................................................................ 16•19

Ongoing Asset Allocation ....................................................................................... 16•20

What is Portfolio Monitoring? ......................................................................16•22

Monitoring the Markets and the Client .................................................................. 16•23

Monitoring the Economy ....................................................................................... 16•23

How is Portfolio Performance Evaluated? ..................................................16•24

Measuring Portfolio Returns ................................................................................... 16•24

Calculating the Risk-Adjusted Rate of Return ......................................................... 16•25

Other Factors in Performance Measurement ........................................................... 16•26

Summary .........................................................................................................16•27




CONTENTS xxi

SECTION VII

ANALYSIS OF MANAGED PRODUCTS

17 Fundamentals of Managed and Structured Products .................17•1

What Factors are Driving the Growth of Managed

and Structured Products? ..............................................................................17•5

Recent Industry Developments – Meeting the Evolving Needs of Investors .............. 17•6

Regulatory Considerations ........................................................................................ 17•6

What Are Managed and Structured Products? ............................................17•6

Types of Managed and Structured Products .............................................................. 17•8

How do Managed and Structured Products Compare? ............................17•10

Advantages of Managed Products ............................................................................ 17•10

Advantages of Structured Products .......................................................................... 17•11

Disadvantages of Managed Products ....................................................................... 17•12

Disadvantages of Structured Products ..................................................................... 17•13

Risks Involved With Managed and Structured Products .......................................... 17•13

How is the Market Evolving for Managed and Structured Products? ......17•14

Outcome Based Investment Solutions ..................................................................... 17•14

Changing Compensation Models............................................................................ 17•16

Summary .........................................................................................................17•17

18 Mutual Funds: Structure and Regulation ..................................18•1

What is a Mutual Fund? .................................................................................. 18•5

Advantages of Mutual Funds..................................................................................... 18•6

Disadvantages of Mutual Funds ................................................................................ 18•7

What is the Structure of Mutual Funds? ...................................................... 18•8

Mutual Fund Trust Structure .................................................................................... 18•8

Mutual Fund Corporation Structure ......................................................................... 18•9

Organization of a Mutual Fund ................................................................................ 18•9




CANADIAN SECURITIES COURSE • VOLUME 1xxii

Pricing Mutual Fund Units or Shares ...................................................................... 18•11

Charges Associated with Mutual Funds .................................................................. 18•12

What are Labour-Sponsored Venture Capital Corporations? .................18•17

Advantages of Labour-Sponsored Funds ................................................................. 18•17

Disadvantages of Labour-Sponsored Funds ............................................................. 18•18

How are Mutual Funds Regulated? ...............................................................18•18

Mutual Fund Regulatory Organizations .................................................................. 18•19

National Instruments 81-101 and 81-102 .............................................................. 18•20

General Mutual Fund Requirements ....................................................................... 18•20The Fund Facts Document ..................................................................................... 18•20

The Simplified Prospectus ...................................................................................... 18•23

What Other Forms and Requirements are Necessary? ........................... 18•25

Registration Requirements for the Mutual Fund Industry ....................................... 18•25

Mutual Fund Restrictions ....................................................................................... 18•26

What is the “Know Your Client” Rule? .......................................................18•31

Suitability and Know Your Product ......................................................................... 18•32

The Role of KYC Information in Opening an Account .......................................... 18•33

What are the Requirements when Openingand Updating an Account? ........................................................................... 18•34

Relationship Disclosure .......................................................................................... 18•34

New Accounts ........................................................................................................ 18•36

Updating Client Information .................................................................................. 18•36

Distribution of Mutual Funds by Financial Institutions .......................................... 18•37

Summary .........................................................................................................18•39

19 Mutual Funds: Types and Features ............................................19•1

What are the Different Types of Mutual Funds? ......................................... 19•5Money Market Funds ............................................................................................... 19•5

Fixed-Income Funds ................................................................................................. 19•6

Balanced Funds......................................................................................................... 19•6

Equity Funds ............................................................................................................ 19•7




CONTENTS xxiii

Specialty Funds ......................................................................................................... 19•9

Index Funds .............................................................................................................. 19•9

Target-date Funds ................................................................................................... 19•10

Comparing Fund Types .......................................................................................... 19•10

What are the Different Fund Management Styles? ...................................19•12

Indexing and Closet Indexing ................................................................................. 19•12

How are Mutual Fund Units or Shares Redeemed? ...................................19•13

Tax Consequences................................................................................................... 19•13

Reinvesting Distributions ....................................................................................... 19•16 Withdrawal Plans ................................................................................................... 19•17

Suspension of Redemptions .................................................................................... 19•20

How is Mutual Fund Performance Compared? ......................................... 19•20

Reading Mutual Fund Quotes ................................................................................ 19•21

Measuring Mutual Fund Performance..................................................................... 19•22

Issues that Complicate Mutual Fund Performance .................................................. 19•24

Summary .........................................................................................................19•27

20 Segregated Funds and Other Insurance Products .......................20•1 What are the Different Segregated Fund Features? .................................. 20•5

Maturity Guarantees ................................................................................................. 20•6

Death Benefits .......................................................................................................... 20•7

Creditor Protection ................................................................................................... 20•8

Bypassing Probate ..................................................................................................... 20•9

Cost of the Guarantees ............................................................................................. 20•9

Bankruptcy and Family Law ..................................................................................... 20•9

Comparison to Mutual Funds ................................................................................... 20•9

How are Segregated Funds Taxed? ..............................................................20•11

Impact of Allocations on Net Asset Values .............................................................. 20•12

Tax Treatment of Guarantees .................................................................................. 20•12

Tax Treatment of Death Benefits ............................................................................. 20•14




CANADIAN SECURITIES COURSE • VOLUME 1xxiv

How are Segregated Funds Regulated? ...................................................... 20•14

Monitoring Solvency .............................................................................................. 20•14

The Role Played by Assuris ..................................................................................... 20•15

What are other Insurance Products? ......................................................... 20•16

Guaranteed Minimum Withdrawal Benefit Plans ................................................... 20•16

Portfolio Funds ....................................................................................................... 20•17

Summary ........................................................................................................ 20•18

21 Hedge Funds.............................................................................21•1How has the Market for Hedge Funds Evolved? ...........................................21•5

Comparisons to Mutual Funds ................................................................................. 21•5

Investing in Hedge Funds ......................................................................................... 21•6

Tracking Hedge Fund Performance ........................................................................... 21•8

What are the Benefits and Risks of Hedge Funds? ......................................21•8

Benefits ..................................................................................................................... 21•8

Risks ......................................................................................................................... 21•9

Due Diligence......................................................................................................... 21•11

What are the Different Hedge Fund Strategies? .......................................21•14Relative Value Strategies .......................................................................................... 21•15

Event-Driven Strategies........................................................................................... 21•16

Directional Funds ................................................................................................... 21•17

What are Funds of Hedge Funds? ................................................................21•20

Advantages.............................................................................................................. 21•21

Disadvantages ......................................................................................................... 21•22

Summary .........................................................................................................21•23




CONTENTS xxv

22 Exchange-Listed Managed Products ..........................................22•1

What are Closed-End Funds? ........................................................................ 22•5

Advantages of Closed-End Funds .............................................................................. 22•5

Disadvantages of Closed-End Funds ......................................................................... 22•6

What are Income Trusts? ............................................................................... 22•6

Real Estate Investment Trusts (REITs) ...................................................................... 22•7

Business Trusts .......................................................................................................... 22•8

What are Exchange-Traded Funds? .............................................................. 22•9

Key Features of ETFs .............................................................................................. 22•10

The Various Types of Exchange-Traded Funds ........................................................ 22•11

Creation and Redemption Process .......................................................................... 22•16

The Risks of Investing in Exchange-Traded Funds .................................................. 22•18

Comparing ETFs and Mutual Funds ...................................................................... 22•22

Trading ETFs .......................................................................................................... 22•26

Recent Trends in ETFs............................................................................................ 22•27

Regulatory Issues .................................................................................................... 22•28

What are Exchange-Traded Notes (ETNs) ................................................ 22•28

What is Listed Private Equity? ................................................................... 22•29Structure of Listed Private Equity Companies ......................................................... 22•30

Advantages and Disadvantages of Listed Private Equity .......................................... 22•31

Summary ........................................................................................................ 22•33

23 Fee-Based Accounts ...................................................................23•1

What are the Different Fee-Based Accounts? ............................................ 23•4

Managed Accounts ................................................................................................... 23•5

Fee-Based Non-Managed Accounts ........................................................................... 23•6

Advantages and Disadvantages of Fee-Based Accounts .............................................. 23•7Discretionary Accounts ............................................................................................. 23•7




CANADIAN SECURITIES COURSE • VOLUME 1xxvi

What are the Different Types of Managed Accounts? ............................... 23•8

Single-Manager Accounts ......................................................................................... 23•8

Multi-Manager Accounts ........................................................................................ 23•10

Private Family Office .............................................................................................. 23•13

Summary .........................................................................................................23•14

24 Structured Products ..................................................................24•1

What are Principal-Protected Notes? .......................................................... 24•5

PPN Guarantors, Manufacturers and Distributors .................................................... 24•5The Structure of PPNs.............................................................................................. 24•6

Risks Associated with PPNs ...................................................................................... 24•8

Tax Implications of PPNs ......................................................................................... 24•9

What are Linked Guaranteed Investment Certificates? .......................... 24•10

Structure of Linked GICs ....................................................................................... 24•10

How Returns are Determined ................................................................................. 24•11

Risk Associated with Linked GICs .......................................................................... 24•12

Tax Implications ..................................................................................................... 24•13

What are Split Shares? ..................................................................................24•13Risks Associated with Split Shares ........................................................................... 24•14

Tax Implications ..................................................................................................... 24•15

What are Asset-Backed Securities? .............................................................24•16

The Securitization Process ...................................................................................... 24•17

Asset-Backed Commercial Paper ............................................................................. 24•18

What are Mortgage-Backed Securities? .................................................... 24•20

Structure and Benefits of MBS................................................................................ 24•21

Summary ........................................................................................................ 24•23




CONTENTS xxvii

SECTION VIII

WORKING WITH THE CLIENT

25 Canadian Taxation ....................................................................25•1

How does the Canadian Taxation System Work? ....................................... 25•5

The Income Tax System in Canada ........................................................................... 25•5

Types of Income ....................................................................................................... 25•6

Calculating Income Tax Payable ................................................................................ 25•7

Taxation of Investment Income ................................................................................ 25•7Tax-Deductible Items Related to Investment Income ................................................ 25•9

How are Investment Gains and Losses Calculated? ...................................25•11

Disposition of Shares .............................................................................................. 25•12

Disposition of Debt Securities ................................................................................ 25•14

Capital Losses ......................................................................................................... 25•15

Tax Loss Selling ...................................................................................................... 25•16

What are Tax Deferral Plans? ......................................................................25•17

Registered Pension Plans (RPPs) ............................................................................. 25•17

Registered Retirement Savings Plans (RRSPs) ......................................................... 25•18

Registered Retirement Income Funds (RRIFs) ........................................................ 25•23

Deferred Annuities ................................................................................................. 25•23

Tax-Free Savings Accounts (TFSA) ......................................................................... 25•24

Registered Education Savings Plans (RESPs) ........................................................... 25•25

Pooled Registered Pension Plans (PRPPs) ............................................................... 25•26

What are Tax Planning Strategies? ............................................................. 25•27

Summary ........................................................................................................ 25•29




CANADIAN SECURITIES COURSE • VOLUME 1xxviii

26 Working with the Retail Client .................................................26•1

What is the Financial Planning Approach? .................................................. 26•5

What are the Steps in the Financial Planning Process? ............................. 26•5

Establishing the Client-Advisor Relationship ............................................................ 26•6

Collecting Data and Information .............................................................................. 26•6

Analyzing Data and Information .............................................................................. 26•8

Recommending Strategies to Meet Goals .................................................................. 26•9

Implementing Recommendations ............................................................................. 26•9

Conducting a Periodic Review or Follow-Up ............................................................ 26•9

What is the Life Cycle Hypothesis?..............................................................26•10

What are Ethics and the Advisor’s Standards of Conducts? ....................26•12

The Code of Ethics ................................................................................................. 26•12

Standards of Conduct ............................................................................................. 26•13

Summary ........................................................................................................ 26•22

Appendix A .................................................................................................... 26•24

Appendix B – Client Scenarios .................................................................... 26•28

27 Working with the Institutional Client .......................................27•1

What are the Sell-Side and the Buy-Side of the Market? .......................... 27•6

Investment Dealers ................................................................................................... 27•6

The Buy Side ............................................................................................................ 27•7

Institutional Clients .................................................................................................. 27•7

Direct Electronic Access .......................................................................................... 27•10

What are the Responsibilities of a Buy-Side Portfolio

Manager and Trader? .....................................................................................27•12

The Buy-Side Portfolio Manager ............................................................................ 27•12The Buy-Side Trader ............................................................................................... 27•13

Criteria for Selecting a Sell-Side Broker .................................................................. 27•13




CONTENTS xxix

What is the Organizational Structure of a Sell-Side Trading Firm?........27•14

Organizational Structure of an Investment Dealer .................................................. 27•14

Equity Sales and Trading Department ..................................................................... 27•16

Prime Brokerage ..................................................................................................... 27•17

Research ................................................................................................................. 27•18

What are the Revenue Sources for Sell-Side Trading Firms?...................27•18

Best Execution ........................................................................................................ 27•19

Revenue Sources of a Sell-Side Equity Trading Desk ............................................... 27•19

Revenue Sources of a Sell-Side Fixed-Income Trading Desk .................................... 27•21Soft-Dollar Arrangements ....................................................................................... 27•22

How does Institutional Clearing and Settlement Work? ..........................27•23

The Settlement Process ........................................................................................... 27•23

Challenges with Institutional Trade Processing ........................................................ 27•24

Straight-Through Processing (STP) ........................................................................ 27•24

What are the Suitability Requirements for Institutional Clients? .......... 27•25

What are the Roles and Responsibilities in the Institutional Market? ... 27•25

The Role of the Institutional Salesperson ................................................................ 27•27

The Role of the Institutional Trader ........................................................................ 27•28

What is the Importance of Knowing Investment Styles, Guidelines

and Restrictions? ............................................................................................27•32

Fixed-Income Styles ................................................................................................ 27•32

Equity Styles ........................................................................................................... 27•33

Typical Investment Guidelines and Restrictions for Equity Mandates ..................... 27•34

What is Algorithmic Trading? ......................................................................27•36

High Frequency Trading (HFT).............................................................................. 27•36

Dark Pools .............................................................................................................. 27•37

Summary .........................................................................................................27•38



CANADIAN SECURITIES COURSE • VOLUME 1xxx

Summary for Volume 2 ....................................................................S•1

Glossary ..........................................................................................G•1

Selected Web Sites .......................................................................Web•1

volume 1 - chapter 00 - table of contents

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