Exactprep CSC1 Questions

Using Moody’s long-term rating scale,Caais assigned to obligations that are speculative and subject to very high credit risk. This rating indicates that the issuer is highly vulnerable to adverse conditions, though it has not yet defaulted.

C (Option A):Indicates obligations that are in default.

B (Option B):Reflects obligations with speculative elements and higher risk than investment-grade ratings.

Ba (Option C):Denotes speculative-grade credit but with lower risk compared to Caa.

The investor's goal is to gainexposure to the Canadian stock marketwhile maintainingminimal risk exposure. Among the provided options, anindex-linked guaranteed investment certificate (GIC)is the most suitable choice.

Key Characteristics of an Index-Linked GIC:

Capital Protection:

Index-linked GICs guarantee the principal investment amount, offering the security of a GIC while tying returns to the performance of a stock index (e.g., the S&P/TSX Composite Index).

This ensures no loss of capital regardless of market performance.

Market Exposure:

The return on an index-linked GIC is linked to the performance of the underlying index, providing exposure to the stock market. However, this comes without the downside risk associated with direct stock or fund investments.

Low Risk:

The combination of principal protection and market exposure makes it ideal for risk-averse investors seeking growth potential.

Review of Other Options:

A. Canadian Bank Preferred Shares:

While preferred shares provide stable dividends and relatively low volatility compared to common shares, they still carry market risk and are not as secure as GICs.

B. Index Exchange-Traded Fund (ETF):

ETFs track stock indices and offer diversification, but they expose investors to the full market risk of the underlying index, making them unsuitable for those seeking minimal risk exposure.

C. Call Option:

Call options are speculative derivatives that provide leverage for market exposure but carry significant risk of loss, making them inappropriate for a low-risk investor.

Why D is Correct:

Anindex-linked GICbalances the investor's objective of gaining exposure to the Canadian stock market with the need for minimal risk by guaranteeing principal protection while offering potential returns tied to market performance.

References:

Canadian Securities Course (CSC), Volume 1, Chapter 6: Fixed-Income Securities – Features and Types. Discussion on index-linked GICs and their suitability for risk-averse investors​.

Explanation of risk characteristics of preferred shares, ETFs, and derivatives in Chapter 8 and 10 of Volume 1​.

Retained earningsrepresent the portion of a company’s annual profit that is retained and not paid out as dividends. It is used to reinvest in the business or pay down debt.

B. Comprehensive incomeincludes all changes in equity except those from owner contributions or distributions.

C. Share capitalrefers to funds raised by issuing shares.

D. Gross profitis revenue minus the cost of goods sold, not the portion retained.

References:Volume 1, Chapter 11 ("Corporations and Their Financial Statements")​.

TheEnergy sectoris one of the highest-weighted sectors in theS&P/TSX Composite Indexbased on market capitalization. This reflects Canada's resource-rich economy, where energy companies, including oil, gas, and related services, make up a significant portion of the market.

Other options:

Health care: A relatively small portion of the index.

Utilities: Have a smaller weight compared to energy.

Information technology: While growing, it has not surpassed energy in weight within the Canadian market.

References:

Volume 1, Chapter 8:Equity Securities, section on "Canadian Market Indexes" outlines the composition and sectoral weightings of the S&P/TSX Composite Index​.