Canadian Securities Course (CSC) Level 2 Practice Exam

In what way do Split Shares differ from traditional shares?

1. Commercial paper with a maturity of less than one year backed by specific assets.

2. Divide attributes of shares to create separate claims, often with dividends.

3. Prepackaged securities with specific risk and return profiles assembled by banks.

4. Include assets reacting to interest rates and offering stable potential gains.

The correct answer is: Divide attributes of shares to create separate claims, often with dividends.

Split shares differ from traditional shares primarily in how they compartmentalize the attributes and rights associated with the equity, thus creating separate claims. This is achieved by dividing the income and capital appreciation aspects of the shares into different components. Typically, in a split share structure, one class of shares may be designed to receive fixed dividends (often referred to as "preferred" or "income" shares), while another class may focus on capital appreciation (often called "common" or "equity" shares). This allows investors to choose their preferred risk-return profile, tailored to their specific investment needs. This structure is distinct from traditional shares, which usually represent a straightforward claim to both income (dividends) and growth (appreciation) based on company performance. As a result, split shares offer investors specialized investment opportunities that traditional shares do not provide by leveraging the separation of claims and benefits. The other options speak about different financial instruments or characteristics but do not accurately reflect the fundamental nature of split shares. For example, some talk about commercial paper, which is a short-term financing tool, while others refer to prepackaged securities or assets connected to interest rates, none of which capture the unique separation of income and capital growth that defines split shares.