1. THE FIXED-INCOME MARKETPLACE

• To finance operations or growth

• To take advantage of financial leverage

2.THE BASIC FEATURES AND TERMINOLOGY OF FIXED-INCOME SECURITIES

BOND TERMINOLOGY

• Par value

• Coupon rate

• Maturity date

• Term to maturity

• Bond price

• Yield to maturity

Liquidity, negotiability, and marketability

STRIP BONDS

Zero coupon bond is high-quality bonds separates future-dated interest coupons from the rest of the bond (bond residue).

CALLABLE BONDS

Redemption feature : Bond issuers often reserve the right, but not the obligation, to pay off the bond before maturity.

STANDARD CALL FEATURES

Allows the issuer to call bonds for redemption at a specified price on either specific dates.

EXTENDIBLE AND RETRACTABLE BONDS

-Option to extend the investment

-Option to redeem early

CONVERTIBLE BONDS

Option of exchanging the bond for common shares

FORCED CONVERSION

• It relieves the issuer of the obligation to make interest payments on debt once investors convert their debt into equities.

• It can free up room for new debt financing, if needed.

SINKING FUNDS AND PURCHASE FUNDS

• Sinking funds are sums of money that are set aside out of earnings each year to provide for the repayment of all or part of a debt issue by maturity.

• A fund is set up to retire a specified amount of the outstanding bonds or debentures through purchases in the market

PROTECTIVE PROVISIONS OF CORPORATE BONDS

• Security

• Negative pledge

• Limitation on sale and leaseback transactions

• Sale of assets or merger

• Dividend test

• Debt test

• Additional bond provisions

• Sinking or purchase fund and call provisions

3. GOVERNMENT OF CANADA SECURITIES

BONDS

Government of Canada issues marketable bonds in its own name.

TREASURY BILLS

T-bills are short-term government obligations.

CANADA SAVINGS BONDS AND CANADA PREMIUM BONDS

(CSBs) and (CPBs) were a secure savings product fully guaranteed by the Government of Canada.

REAL RETURN BONDS

Coupon payments and principal repayment are adjusted for inflation to provide a fixed real coupon rate.

4. PROVINCIAL AND MUNICIPAL GOVERNMENT SECURITIES

GUARANTEED BONDS

PROVINCIAL SECURITIES

• They can be purchased only by residents of the province.

• They can be purchased only at a certain time of the year.

• They are redeemable every six months (or, in Quebec, at any time).

MUNICIPAL SECURITIES

Instalment debenture (serial bond). Part of this bond matures in each year of its term.

5. TYPES OF CORPORATE BONDS

MORTGAGE BONDS

Agreement to pledge land, buildings, or equipment as security for a loan.

FLOATING-RATE SECURITIES

Variable-rate securities are a type of corporate issue that automatically adjusts to changing interest rates.

DOMESTIC, FOREIGN, AND EUROBONDS

Domestic bonds are issued in the currency and country of the issuer.

Foreign bonds are issued outside of the issuer’s country and denominated in the currency of the country in which they are issued.

Eurobonds are international bonds issued in a currency other than the currency of the country where the bond is issued.

• Collateral trust bond

• Equipment trust certificates

• Subordinated debentures

• Corporate notes

• High-yield bonds

6. OTHER FIXED-INCOME SECURITIES

BANKERS’ ACCEPTANCES

BA is a commercial draft drawn by a borrower for payment on a specified date.

COMMERCIAL PAPER

Either an unsecured promissory note issued by a corporation or an asset-backed security backed by a pool of underlying financial assets.

TERM DEPOSITS

Offer a guaranteed rate for a short-term deposit.

GUARANTEED INVESTMENT CERTIFICATES

GIC offer fixed rates of interest for a specific term. Both principal and interest payments are guaranteed.

Types of Guaranteed Investment Certificates:

• Escalating-rate GIC

• Laddered GIC

• Instalment GIC

• Index-linked GIC

• Interest-rate linked GIC

FIXED-INCOME MUTUAL FUNDS AND EXCHANGE-TRADED FUNDS

7. BOND QUOTES AND RATINGS

DBRS, Moody’s, and S&P provide independent rating services for many debt securities.

1. FISCAL POLICY

SPENDING

-government spending on infrastructure can have a stimulative effect on the whole economy.

TAXATION

-the government may increase taxation to lower inflation, making it more difficult for consumers and businesses to spend.

2. THE BANK OF CANADA

-Monetary policy

-The Canadian financial system

-Physical currency

-Funds management

3. MONETARY POLICY

-Inflation

Interest Rates

The Bank raises interest rates.

• Borrowing becomes more expensive.

• Borrowing decreases and consumption and business investment therefore decrease.

Money Supply

The Bank reduces the money supply.

• Interest rates rise in response.

• Borrowing becomes more expensive.

• Borrowing decreases and consumption and business investment thus decrease.

-Recession

• reverse

IMPLEMENTING MONETARY POLICY

• Target overnight rate: operating band that is 50 basis points wide

• Open market operations : Special Purchase and Resale Agreements (SPRA), commonly called Specials, and Sale and Repurchase Agreements (SRA)

• Drawdowns and redeposits

4. THE CHALLENGES OF GOVERNMENT POLICY

Timing lags, Political considerations, Future expectations, Coordination of federal and provincial policies, High federal debt, Impact of international economies

Fiscal and Monetary Economic Policy

-recession

• Increase government spending • Decrease taxes

Increase money supply • Decrease interest rates

-High inflation

• reverse

THE ECONOMY

1. DEFINING ECONOMICS

-microeconomics: individual markets of goods and services

-macroeconomics: employment levels, interest rates, inflation, recessions, government spending

THE DECISION MAKERS

consumers, businesses, and governments

DEMAND, SUPPLY, AND MARKET EQUILIBRIUM

2.MEASURING ECONOMIC GROWTH

GROSS DOMESTIC PRODUCT (GDP)

The total market value of all the final goods and services produced in a country over a given period.

-Income approach: adds up all of the income generated by this economic activity.

-Expenditure approach: add up everything that consumers, businesses, and governments spend money.

GDP = c+i+g+(x-m)

REAL AND NOMINAL GROSS DOMESTIC PRODUCT

-Nominal gross domestic product (nominal GDP) is the dollar value of all goods and services produced.

-real gross domestic product (real GDP). This measure removes the changes in output that are attributable to inflation.

PRODUCTIVITY

key factors contribute to gains in productivity: Technological advances, Population growth, Improvements in training, education, and skill

3.THE BUSINESS CYCLE

PHASES OF THE BUSINESS CYCLE

-expansion, peak, contraction, trough, and recovery

ECONOMIC INDICATORS

• Leading indicators: Housing starts, Manufacturers’ new orders, Commodity prices, Stock prices, The money supply

• Coincident indicators: Personal income, GDP, Industrial production, Retail sales

• Lagging indicators: Unemployment, Inflation rate, Labour costs, Private sector, plant and equipment spending, Business loans

IDENTIFYING RECESSIONS

Depth, Duration, Diffusion

4. THE LABOUR MARKET

15 years of age and older

• Those who are unable to work • Those who are not working by choice • The labour force

LABOUR MARKET INDICATORS

• Participation rate • Unemployment rate

TYPES OF UNEMPLOYMENT

Cyclical unemployment, Seasonal unemployment, Frictional unemployment, Structural unemployment

5. THE ROLE OF INTEREST RATES

DETERMINANTS OF INTEREST RATES

• Demand and supply of capital

• Default risk

• Foreign interest rates and the exchange rate

• Central bank credibility

• Inflation

HOW INTEREST RATES AFFECT THE ECONOMY

• They reduce business investment

• They encourage saving

• They reduce consumption

-Real interest rate is the nominal interest rate minus the expected inflation rate.

6. THE IMPACT OF INFLATION

MEASURING INFLATION

The Consumer Price Index (CPI) is a widely used measure of inflation.

THE COSTS OF INFLATION

• erode the standard of living

• reduces the real value of investments

• distorts the price signals sent to market participants

• rising interest rates and a recession

THE CAUSES OF INFLATION

-demand-pull inflation

-cost-push inflation

Phillips curve

• Lower unemployment is achieved in the short run by increasing inflation at a faster rate.

• Lower inflation is achieved at the cost of possibly increased unemployment and slower economic growth.

7. INTERNATIONAL FINANCE AND TRADE

BALANCE OF PAYMENTS

-Current account: records the import and export of goods and services between Canadians and foreigners

– Capital and financial account: records financial flows between Canadians and foreigners

DETERMINANTS OF EXCHANGE RATES

Commodities, Inflation, Interest rates, Trade, Economic performance, Public debts and deficits, Political stability

1. REGULATORS

-CANADIAN SECURITIES ADMINISTRATORS (CSA)

Umbrella organization of Canada’s ten provincial and three territorial securities regulators designed to improve, coordinate and harmonize regulation of the Canadian capital markets.

-SELF-REGULATORY ORGANIZATIONS (SRO)

Canadian SROs include the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association (MFDA).

-THE INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA (IIROC)

IIROC oversees all investment dealers and trading activity on debt and equity marketplaces in Canada.

Financial compliance, Business conduct compliance, Registration, Enforcement, Market surveillance

-THE MUTUAL FUND DEALERS ASSOCIATION (MFDA)

The MFDA is the mutual fund industry’s SRO responsible for regulating the distribution and sales of mutual funds by its members in Canada

-THE OFFICE OF THE SUPERINTENDENT OF FINANCIAL INSTITUTIONS (OSFI)

independent agency of the Government of Canada designed to contribute to the safety and soundness of the Canadian financial system.

-INVESTOR PROTECTION FUNDS

The securities industry offers the investing public protection against loss as a result of the financial failure of any firm in the self-regulatory system.

-CANADIAN INVESTOR PROTECTION FUND (CIPF)

The primary role of the CIPF is investor protection; its secondary role is overseeing the self-regulatory system.

-MUTUAL FUND DEALERS ASSOCIATION INVESTOR PROTECTION CORPORATION (MFDA IPC)

Provide protection for eligible customers of insolvent MFDA member firms.

-CANADA DEPOSIT INSURANCE CORPORATION (CDIC)

Federal Crown Corporation that provides deposit insurance and contributes to the stability of Canada’s financial system.

-PROVINCIAL INSURANCE CORPORATIONS

Protect the deposits of credit union members.

2. REGULATION AND SUPERVISION

-REGULATION

Consumer protection, Fairness, Economic stability, Social objectives

-PRINCIPLES-BASED REGULATION

The regulators set objectives for securities dealers and allow the firms themselves to decide how best to meet those objectives.

-SECURITIES REGULATION IN CANADA

In Canada, there is no federal regulatory body for the securities industry, unlike in the United States, where the national Securities and Exchange Commission (SEC) has considerable regulatory authority.

Protection flows from the SROs, as well as from the provincial and territorial regulatory authorities.

-DISCLOSURE

Full, true, and plain disclosure.

Methods to protect investors:

• Registration of securities dealers and advisors

• Disclosure of facts necessary to make reasoned investment decisions

• Enforcement of the laws and policies

-NATIONAL REGISTRATION DATABASE (NRD)

Web-based system used by investment dealers and employees to file registration forms electronically when applying for approval by a stock exchange, the CSA, or IIROC.

-GATEKEEPER

• Collect and record client information that is accurate and complete.

• Monitor activity in client accounts.

• Report any suspicious transactions or proposed transactions in client accounts.

-KNOW YOUR CLIENT (KYC)

• Learn the essential facts relative to every client and to every order or account accepted.

• Verify that the acceptance of any order for any account is within the bounds of good business practice. • Verify that recommendations made for any account are appropriate for the client’s investment objectives, personal circumstances, and tolerance to risk.

-CLIENT RELATIONSHIP MODEL (CRM)

The objective is increased transparency for investors regarding the fees they pay, the services they receive, potential conflicts of interest, and the performance of their accounts.

-RELATIONSHIP DISCLOSURE

• The types of products and services offered by the firm

• The terms of the account relationship to which the client has consented

• The process used by the firm to assess investment suitability and the client’s KYC information

• The date on which account suitability will be reviewed

• All fees and charges associated with operating, transacting, and holding investments in the account

• The firm’s complaint handling procedures

-CONFLICT OF INTEREST MANAGEMENT

• Avoiding the conflict

• Disclosing the conflict

• Otherwise controlling the conflict situation

-SUITABILITY ASSESSMENT

• A trade is accepted.

• A recommendation is made.

• Securities are transferred or deposited to an account.

• There is a change of representative or portfolio manager responsible for the account.

• There is a material change to the KYC information for the account.

3. REMEDIATION

-ARBITRATION

• Attempts have been made to resolve the dispute with the investment dealer.

• The claim does not exceed $500,00

-OMBUDSMAN FOR BANKING SERVICES AND INVESTMENTS (OBSI)

This organization investigates customer complaints against financial services providers, including some banks and other deposit-taking organizations, investment dealers, mutual fund dealers, and mutual fund companies. OBSI is independent of the financial services industry.

4.ETHICAL STANDARDS

EXEMPLES

• Deceiving the public, the buyer, or the vendor as to price of any transaction or the value of any security

• Creating, or attempting to create, a false or misleading appearance of active public trading in a security in an effort to make a profit

• Entering, or attempting to enter, into any arrangement to sell and repurchase a security in an effort to manipulate the market

• Making a fictitious trade that involves no change in the beneficial ownership of a security in an effort to mislead the public

• Using high-pressure or otherwise undesirable selling techniques

• Violating any statute applicable to the sale of securities

• Misleading a client as to the risk involved in purchasing a specific security

• Trading in one’s own account before effecting the same trade for a client (a practice known as front running)

• Conducting oneself in a way that would bring the securities business, the exchanges, or IIROC into disrepute

-PROHIBITED SALES PRACTICES

Such regulations are designed to curb unethical behaviour, dishonest conduct, and high-pressure selling tactics.

NATIONAL DO NOT CALL LIST (DNCL)

The DNCL rules prohibit telemarketers and clients of telemarketers from calling any number that has been registered on the DNCL for more than 31 days.

1. INVESTMENT CAPITAL

Characteristic of capital: mobility, sensitivity to its environment, and scarcity

Components of country risk factors: political environment, Economic trends, Fiscal policy, Monetary policy, Investment opportunities, labour force.

Suppliers of capital: Individuals, Non-financial domestic corporations, Governments, Foreign investors

The Sources and Users of Investment Capital

Sources of Capital

-Retail investors are individual clients who buy and sell securities for their personal accounts.

-Institutional investors are organizations, such as pension and mutual fund companies, that trade in large-share quantities or dollar amounts. They typically have a steady flow of money to invest.

-Foreign direct investment in Canada tends to concentrate in manufacturing, petroleum, natural gas, mining, and smelting. Some industries have restrictions on foreign investment.

Users of Capital

-Individuals need capital to finance large purchases such as houses, cars, and major appliances. They usually obtain it in the form of personal loans, mortgage loans, and charge accounts.

-Businesses require massive sums of capital to finance day-to-day operations, renew and maintain plants and equipment, and expand and diversify their activities. They generate much of that capital internally, in the form of profits retained in the business. They borrow from financial intermediaries for other needs, and they raise the remainder in securities markets.

-Governments are major issuers of securities in public markets, either directly or through guaranteeing the debt of their Crown corporations. When revenues fail to meet expenditures, or when they undertake large capital projects, governments must borrow.

2. THE FINANCIAL INSTRUMENTS

The Different Types of Financial Instruments

-Fixed-income securities (also called debt securities) formalize a relationship in which the issuer promises to repay the loan at maturity and, in the interim, makes interest payments to the investor. The term of the loan varies depending on the type of instrument.

-Equity securities (commonly called stocks, equities, or shares) represent some form of ownership stake in the company that issued them. For example, if the value of a company increases, the owner of stock in that company receives a capital gain upon selling it.

-A derivative is a product whose value is derived from the value of an underlying instrument, such as a stock or an index. Unlike stocks and bonds, derivatives are more suited to sophisticated investors.

-Managed products (also called investment funds) are typically pools of capital gathered from investors to buy securities according to a specific investment mandate.

-A structured product is a financially engineered product with the characteristics of debt, equity, and an investment fund.

3. THE FINANCIAL MARKETS

The capital market is made up of many individual financial markets, including stock markets, bond markets, and money markets. Only short-term fixed-income securities with a term of one year or less trade in the money market.

Primary markets and secondary markets

-In the primary market, newly issued securities are sold by companies and governments to investors. IPO

-In the secondary market, investors trade securities that have already been issued by companies and governments.

Auction market

In an auction market, securities are bought and sold by investors. Investment dealers, who typically act as agents, execute the buy and sell orders on behalf of their clients.

Stock exchanges

A stock exchange is an auction market where buyers and sellers of securities meet to trade with each other and where prices are established according to the laws of supply and demand.

Exchange liquidity

• Frequent trades

• Narrow price spread between bid and ask prices

• Small price fluctuations from trade to trade

Canadian exchanges

• Toronto Stock Exchange (TSX)

• TSX Venture Exchange

• TSX Venture Exchange

• TSX Venture Exchange

• ICE NGX Canada

• Canadian Securities Exchange

• NEO Exchange

Dealer market OTC

OTC consist of a network of banks and investment dealers. Unlike an auction market, where the orders of individual buyers and sellers are entered in a centralized marketplace, a dealer market is a negotiated market where market makers post bid-and-ask quotations via electronic platforms and computer networks. In the OTC market, investment dealers typically act as principals.

-Almost all bonds and debentures are sold through dealer markets.

-Dealer markets are also called unlisted markets.

TRADING IN THE UNLISTED EQUITY MARKET

Investment dealers, who act as market makers, quote their own bids and offers. These market makers hold an inventory of the securities in which they have agreed to make a market.

OVER-THE-COUNTER DERIVATIVES MARKET

They can be custom designed by the buyer and seller, with special features added to the basic properties of options and forwards.

Open 24 hours a day

REPORTING TRADES IN THE EQUITY UNLISTED MARKET

In Canada investment dealers do not have to report unlisted trades except in Ontario.

-web-based system named the Canadian Unlisted Board Inc.

ALTERNATIVE TRADING SYSTEMS ats

Electronic marketplaces that provide automated matching and execution of trades in both the equity and fixed-income markets.

EQUITY ELECTRONIC TRADING SYSTEMS

Alternative trading systems in the equity markets provide automated trade matching and execution of orders from multiple buyers and sellers, a role once performed exclusively by stock exchanges.

FIXED-INCOME ELECTRONIC TRADING SYSTEMS

All bond and money market securities are sold through dealer markets.

• CanDeal

• CBID

• MarketAxess

• CanPX

SECTION 1: THE CANADIAN INVESTMENT MARKETPLACE

1. Describe the relationships between the major participants in the Canadian securities industry.

• Suppliers and users of capital trade financial instruments through financial markets such as stock exchanges and money markets.

• Investment dealers (also called brokers) act as intermediaries by matching investors with the users of capital. Each side of a transaction has its own dealer who matches the trades through the markets.

• Trades and other transactions are cleared and settled through organizations such as CDS Clearing and

Depository Services Inc. and banks. Clearing is the process of confirming and matching security trade details; settlement is the irrevocable moment when cash and securities are exchanged.

• The SROs set and enforce rules that govern market activity and monitor the markets to ensure fairness and transparency.

• The Canadian Investor Protection Fund and similar organizations provide insurance against dealer insolvency.

• Provincial regulators oversee the markets and the SROs.

• The Canadian Securities Institute and similar organizations provide education for industry participants.

2. Distinguish among the three categories of investment dealers including how they are organized.

• Retail firms include full-service investment dealers and self-directed brokers (also known as discount brokers). Full-service retail firms offer a wide variety of products and services for the retail investor. They also provide various levels of advice, depending on the financial and wealth management concerns of their investor clients. Self-directed brokers, on the other hand, are considered the do-it-yourself approach to investing. They execute trades for clients at reduced rates, but they do not provide investment advice.

• Institutional firms are investment dealers that serve exclusively institutional clients, organizations that trade large volumes of securities. Institutional clients include pension funds and mutual funds, and may be domestic or foreign institutional firms. In Canada, foreign firms account for about one-third of all institutional clients. Foreign firms include affiliates of many of the major U.S. and European securities dealers.

• Integrated firms offer products and services across the industry and participate fully in both the retail and institutional markets. Most integrated firms underwrite all types of federal, provincial, and municipal debt, as well as corporate debt and equity issues. They are active in secondary markets, including the money market, as well as on all Canadian stock exchanges and some foreign exchanges.

Front Office

Performs all staff functions pertaining directly to portfolio management activities

• Portfolio management, Trading, Sales, Marketing

Middle Office

Performs functions critical to the efficient operation of the firm

• Compliance, Accounting, Audits, Legal

Back Office

Settles the firm’s security transactions

• Trade settlement

3. Explain the difference between principal and agency transactions.

PRINCIPAL TRANSACTIONS

• Investment dealers may own the securities as part of their inventory.

• Underwriting

• Maintaining an inventory of already issued securities.

AGENCY TRANSACTIONS

• Broker

SERVICES PROVIDED BY INVESTMENT DEALERS

• They provide informed advice about the terms and features for new issues in the primary market, based on their knowledge of current conditions in the secondary markets.

• They add liquidity to the market with relative ease by making transactions from their inventory, rather than waiting for simultaneous matching buy-sell orders from other investors.

• They sometimes act as market makers and carry out market making duties by taking positions in assigned listed stocks to enhance market liquidity and smooth out undue price distortions.

• They sometimes buy listed stocks as principals, thus accumulating large blocks of shares, becoming more competitive in serving their larger institutional clients.

• The liquidity they add to the secondary market enhances the primary market by assuring that buyers of new securities will be able to sell their holdings at reasonable prices.

• Investment dealers also trade from their own account to make a profit.

THE CLEARING SYSTEM

• In Canada, securities are cleared through CDS Clearing and Depository Services.

• Participants with access to the clearing and settlement system primarily include banks, investment dealers, and trust companies.

• The netting process compiles each firm’s clearing settlement sheets and informs each member of the securities or funds it must deliver to balance its account.

4. Distinguish among the roles of the various financial institutions.

CHARTERED BANKS

All chartered banks in Canada operate under the Bank Act.

• Schedule I : 23 banks, Savings deposits are eligible for deposit insurance, which is provided by the Canada Deposit Insurance Corporation (CDIC). Firewalls between services.

• Schedule II : Incorporated and operate in Canada as federally-regulated foreign bank subsidiaries.

• Schedule III : Federally-regulated foreign bank branches of foreign institutions that have been authorized under the Bank Act to do banking business in Canada.

CREDIT UNIONS AND CAISSES POPULAIRES

• The federal legislation governing credit unions is the Cooperative Credit Associations Act (CCAA).

TRUST AND LOAN COMPANIES

• Trust companies act as a trustee in charge of corporate and individual assets such as property, stocks, and bonds.

INSURANCE COMPANIES

Insurance Companies Act

• Life insurance : Health and disability insurance ,Term and whole life insurance, Pension plans, Registered retirement savings plans, Annuities

• Property and casualty insurance : Home, Auto, Commercial business

OTHER FINANCIAL INTERMEDIARIES

• Investment funds

• The Alberta Treasury Branches (ATB Financial)

• Consumer finance companies

• Sales finance companies

• Pension plans

5. Discuss the trends affecting the financial services industry in Canada and globally.

FINANCIAL TECHNOLOGY

Fintech

• Online loans

• Electronic wallets

• Automated financial planning software

ROBO-ADVISORS

• They provide clients with goal-based online investment management.

• Portfolios are created using algorithms based on modern portfolio theory and on online client questionnaires.

• A telephone call with an advisor verifies that the computer-generated portfolio is suitable for the client.

• Advisor support is offered to varying degrees, typically online or by phone.

• Portfolios are built primarily with exchange-traded funds.

• Portfolios are regularly rebalanced.

• Financial planning may be offered in varying degrees.

• Service may be provided to the end client as well as to intermediaries such as advisors and employers.

• Competitive positioning is based on the client experience, which typically encompasses the following services:

• Portfolio management is optimized with tools such as tax-efficient rebalancing across account types.

SHIFTING DEMOGRAPHICS

Aging population in Canada