Question 1

Which one of the following is an example of fraudulent activities?

Accepted Answer

Spreading false rumors about a possible merger is an example of fraudulent activities since it involves disseminating misleading information to manipulate the market for personal gain. The other options are legitimate ways of investing or conducting business.

Question 2

The attractiveness of a Ponzi pyramid scheme consists of:

Accepted Answer

The attractiveness of a Ponzi pyramid scheme lies in convincing investors to invest by promising them high returns, which are then paid out using the money from new investors rather than from actual profits. This cycle continues until the scheme becomes unsustainable and collapses, leaving many investors with significant losses. Selling volatile stocks, convincing investors to invest in non-return assets, or declaring bankruptcy would not be effective strategies for attracting investors to a Ponzi scheme.

Question 3

Which of the following is not one of the major factors the OSC uses to determine whether or not a document is really a security?

Accepted Answer

D

Question 4

The Securities and Exchange Commission is:

Accepted Answer

The Securities and Exchange Commission is a U.S. federal agency that is responsible for regulating U.S. securities markets and protecting investors.

Question 5

Which of the following is not a mechanism designed to maintain investor confidence in capital markets?

Accepted Answer

Due process is a concept pertaining to legal proceedings and is not directly related to maintaining investor confidence in capital markets. Rather, it ensures that an individual's rights are protected in legal proceedings. A, B, and C are mechanisms specifically designed to maintain investor confidence in capital markets by promoting transparency, accountability, and impartiality.

Question 6

When interest payments are made by mailing a cheque to the officially listed owner,the bonds must have been issued in ______ form.

Accepted Answer

When interest payments are made by mailing a cheque to the officially listed owner, it indicates that the bonds were issued in registered form. In registered form, the ownership of the bond is recorded by the issuer, and interest payments are made directly to the registered owner of the bond. This is in contrast to bearer form, where the bondholder physically possesses the bond and can receive payments simply by presenting the bond. Consolidated and booked are not relevant terms for describing bond issuance form.

Question 7

Which of the following is a fraudulent activity?

Accepted Answer

Both activities described are forms of fraud. Selling stocks on an institution with zero external activity is likely a scam, as there is no market for the stocks being sold. Selling penny stocks as blue chip stocks is also fraudulent as it misrepresents the value and risks associated with the stocks.

Question 8

In determining whether a security exists,the OSC looks at:

Accepted Answer

The OSC looks at all of the above factors in determining whether a security exists. The promoter raising money and leading the investor to expect a profit, whether the investor has any control on how the money is spent, and whether there is risk involved are all key indicators that a security exists.

Question 9

Due diligence refers to:

Accepted Answer

Due diligence refers to the process of checking securities offered to the public to ensure they are legitimate. This involves conducting a thorough investigation of the company offering the securities, including reviewing financial statements, legal documents, and other relevant information. The goal is to identify any potential risks or red flags that could impact the investment. While auditing financial statements may be a part of the due diligence process, it is not the only component. Convincing investors to invest in assets is not the definition of due diligence.

Question 10

Use the following statements to answer this question:

Accepted Answer

I is correct as efficient markets are supposed to have all information available to all investors, meaning there should be no asymmetric information.
II is incorrect as investors cannot fully protect themselves from asymmetric information even if they ask for high premiums, there is always some level of risk involved.

Question 11

The bonds must have been issued in ______ form,if coupons representing interest payments are to be physically attached to the security and it is the bondholder's responsibility to submit the coupons for payment,

Accepted Answer

Bearer bonds are securities that do not have the owner's name registered with the issuer, and they have physical coupons attached that the owner must submit for interest payments. Therefore, bearer bonds would be issued in physical form to facilitate the attachment of the coupons. Registered bonds would have the bondholder's name registered with the issuer and would not require physical coupons to be submitted. Consolidated and booked forms are not commonly used in bond issuance.

Question 12

Suppose that the current market interest rate is 12% for non-fraudulent bonds,and that one in six bonds are fraudulent in a given market.What would the interest rate be if a fraud premium is introduced,assuming (1)a one-year investment horizon and (2)the market does not require a risk premium?

Accepted Answer

5 * (1 + k)= 6 * ($1.12)F1S1S1W1F1F1F10 5 * (1 + k)= 6.72 F1S1S1W1F1F1F10 k = 34.4%

Question 13

To which of the following does Gresham's Law apply?

Accepted Answer

Gresham's Law applies to all of the above. The law states that "bad money drives out good," meaning that if two forms of currency are in circulation, people will hoard the one that holds more value and use the less valuable one. This can apply to any situation where there are multiple forms of a commodity or currency in circulation, such as in the used car market or capital markets, as well as counterfeit money being introduced into a system.

Question 14

What does the acronym SEC stand for in regards to the financial system?

Accepted Answer

SEC stands for Securities and Exchange Commission, which is a government agency responsible for regulating and enforcing securities laws in the United States. It oversees the stock market, protects investors, and maintains fair and efficient markets.

Question 15

Why is there a resistance to implementing a federal regulator in Canada?

Accepted Answer

The resistance to implementing a federal regulator in Canada stems from the fact that some provinces will have to give up control over securities regulation, which they are currently in charge of. This has created a sense of competition between the federal and provincial governments. However, there have been discussions and efforts to overcome this resistance and create a more unified and effective securities regulatory system in Canada.

Question 16

Which of the following potentially result from investors losing faith in the capital market?

Accepted Answer

The loss of faith in the capital market can result in investors seeking alternative investments such as off-shore investing or real assets like houses and gold. In extreme cases, it can lead to the collapse of the public capital markets altogether. Therefore, all of the options listed (A, B, and C) are potential consequences of the loss of investor faith in the capital market.

Question 17

When does a "financing gap" occur?

Accepted Answer

The answer of When does a "financing gap" occur?
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Question 18

Sal Bender,not one of the most upstanding citizens,has just been arrested for financial fraud,after he cooked up a get-rich-quick scheme that enticed people to purchase $10 million worth of his interest-bearing bonds.He had promised the investors quarterly coupon payments of $50 each,and that he would return the face value of $1,000 at maturity in five years.The current market interest rate is 7%.His scheme was successful initially,but within four months,it blew up in his face when the police came for him at his beach house in Barbados.Based on your knowledge of bonds,what was the biggest flaw in Sal's scheme?

Accepted Answer

The answer of Sal Bender,not one of the most upstanding...

Question 19

Which of the following cases is not an example of asymmetric information?

Accepted Answer

The other options all involve one party having more information than the other, creating an information asymmetry. Option B, however, has no information asymmetry as Gus is aware that he is buying a lemon car.

Question 20

Asymmetric information is best defined as:

Accepted Answer

Asymmetric information refers to a situation where one party has more or better information than the other party in a transaction or deal. This can lead to one party making a decision that is not in the best interest of the other party, who lacks the necessary information to make an informed decision.

Quiz 17: Investment Banking and Securities Law