WME Exam 2 (2026 v2): Equity and Debt Securities

Topic snapshot

Practice cases

These cases are original Securities Prep practice items aligned to this topic area. They are designed for self-assessment and are not official exam questions.

Case 1

Topic: Equity and Debt Securities

Case: Amrita Kapoor’s retirement income bucket

All amounts are in CAD.

Amrita Kapoor, age 59, sold her dental practice and plans to retire next year. She is single, has no debt, and expects to spend 85,000 annually from her portfolio for the first five years of retirement. At age 65, a defined benefit pension of 62,000 plus CPP and OAS are expected to reduce the portfolio withdrawal need materially. She also plans a condo purchase requiring a 220,000 down payment in 24 months.

Amrita says her fixed-income allocation must “fund known cash needs and stay boring.” After experiencing a double-digit decline in a broad bond ETF during a rate shock, she now wants the fixed-income sleeve to have a low chance of losing more than 5% in any one year. She is in the top marginal tax bracket, but most of this fixed-income sleeve sits in registered accounts, so tax is not the main driver of the debt recommendation.

Current fixed-income sleeve (800,000):

Her advisor notes that the yield curve is still positively sloped, and one colleague argues for extending duration now because rate cuts may occur within 12 months. Amrita replies that she cares more about meeting the condo payment and the first five years of withdrawals than about making a macro interest-rate call.

Question 1

Which debt recommendation is most consistent with Amrita’s stated objectives?

• A. Build a 1-5 year high-quality ladder for cash needs.
• B. Increase long-term provincial bond exposure now.
• C. Shift most fixed income to floating-rate high-yield loans.
• D. Concentrate in intermediate corporate bond funds.

Best answer: A

What this tests: Equity and Debt Securities

Explanation: Amrita’s fixed-income sleeve has a funding job, not a macro-trading job. Because she has a known down payment in two years, five years of planned withdrawals, and a low tolerance for losses, a ladder of high-quality maturities is the most consistent recommendation.

When a client has scheduled cash needs and a stated aversion to fixed-income drawdowns, the debt recommendation should start with liability matching rather than a forecast on interest rates. Amrita needs 220,000 in 24 months and several years of withdrawals before pension income reduces her dependence on the portfolio, so the fixed-income sleeve should emphasize high-quality instruments maturing when cash is required.

• Set aside the down payment in cash, GICs, or short high-quality debt maturing around 24 months.
• Ladder the next several years of withdrawals with high-quality maturities.
• Keep any longer-duration or lower-credit exposure limited and secondary.

A rate-cut call could be right, but it is not the recommendation most aligned with her stated need for predictability.

• Rate-call mismatch: Adding long-term provincial bonds makes the plan depend more on rate forecasts than on matching known liabilities.
• Low duration is not enough: Floating-rate high-yield loans reduce rate risk but still add meaningful credit and drawdown risk.
• Yield over role: Concentrating in corporate bond funds may raise income, but it does not create the cash-flow certainty her plan requires.

Matching high-quality maturities to the condo payment and early withdrawals best fits her low loss tolerance and known liabilities.

Question 2

Using modified duration only, a 0.75% parallel rise in yields would reduce the long-term provincial bond ETF by approximately:

• A. About 11.8%
• B. About 0.9%
• C. About 8.9%
• D. About 4.4%

Best answer: C

What this tests: Equity and Debt Securities

Explanation: Modified duration estimates first-order price sensitivity to a change in yields. With duration 11.8 and a 0.75% rise in yields, the expected price change is about negative 8.85%, so 8.9% is the best estimate.

Modified duration is a first-order estimate of how much a bond’s price changes for a small parallel shift in yields. The approximation is percentage price change equals negative modified duration multiplied by the change in yield. For Amrita’s long-term provincial bond ETF, that is about negative 11.8 times 0.75%, which gives roughly negative 8.85%.

• Higher duration means greater price sensitivity.
• The negative relationship means prices fall when yields rise.
• This is an approximation; convexity would slightly refine the result.

That magnitude helps explain why long-duration exposure is a weak fit for a client who wants low volatility and near-term cash certainty.

• Yield is not duration: The 4.4% style response confuses income with price sensitivity.
• Wrong move size: The 11.8% response roughly matches a 1% yield rise, not 0.75%.
• Too small: A decline near 0.9% ignores how strongly an 11.8-duration fund reacts to rate changes.

Using duration only, 11.8 multiplied by 0.75% gives an approximate 8.9% price decline.

Question 3

If government yields are unchanged but lower-quality credit spreads widen sharply, which holding is most likely to undermine Amrita’s capital-preservation goal?

• A. Investment-grade corporate bond fund
• B. Floating-rate high-yield loan ETF
• C. Long-term provincial bond ETF
• D. Cashable GIC / HISA

Best answer: B

What this tests: Equity and Debt Securities

Explanation: Low duration does not eliminate credit risk. If lower-quality spreads widen sharply, the floating-rate high-yield loan ETF is the holding most likely to suffer a material price decline and conflict with Amrita’s capital-preservation goal.

Interest-rate risk and credit-spread risk are different drivers of debt performance. If government yields do not move, the key issue is credit repricing: investors demand more yield from weaker borrowers, and prices of lower-quality debt fall. The floating-rate high-yield loan ETF has very low duration, so it is less exposed to base-rate changes, but that feature does not protect it from recession-driven spread widening or worsening default expectations.

• Floating-rate structure lowers rate risk.
• High-yield exposure increases credit risk.
• A capital-preservation bucket should not rely heavily on lower-credit debt.

The investment-grade corporate fund also has spread risk, but normally not as much as the high-yield loan ETF.

• Rate risk vs credit risk: Long-term provincial bonds are mainly exposed to government-rate moves, not lower-quality spread widening.
• Investment grade is not the worst: Corporate investment-grade debt would weaken on spread widening, but typically less than high-yield loans.
• Cash stays defensive: Cashable GICs and HISA have little direct exposure to spread repricing.

Its weaker-credit borrowers are most exposed to spread widening, so low duration does not prevent credit-driven losses.

Question 4

For the 220,000 condo down payment due in 24 months, which debt approach is most appropriate?

• A. Keep it in the corporate bond fund for yield.
• B. Move it to floating-rate high-yield loans.
• C. Segregate it in high-quality debt maturing near 24 months.
• D. Leave it in the long-term provincial bond ETF.

Best answer: C

What this tests: Equity and Debt Securities

Explanation: A known two-year liability should usually be funded with high-quality debt maturing close to when the cash is needed. That is classic maturity matching and reduces the chance of a forced sale before the condo purchase.

For a known liability with a known date, the most suitable debt strategy is usually maturity matching. Amrita’s condo down payment is needed in 24 months, so that portion of the fixed-income sleeve should be ring-fenced in high-quality debt that matures around the purchase date. This minimizes the risk that she must sell a volatile bond fund or credit-sensitive holding at a loss just to raise cash.

• Reserve the full down-payment amount now.
• Use high-quality short-term maturities aligned to the 24-month date.
• Keep return-seeking debt exposure separate from earmarked spending funds.

Leaving this money in longer-duration or lower-quality debt would turn a liability reserve into a market bet.

• Duration mismatch: Leaving the down-payment money in long-term provincial bonds creates unnecessary price volatility before the purchase date.
• Credit mismatch: Floating-rate high-yield loans still expose a near-certain liability to credit losses.
• Yield chasing: Corporate bond funds may offer more income, but they do not provide the same maturity certainty for a 24-month need.

A maturity matched to the liability gives the best cash-flow certainty with minimal market-value risk.

Case 2

Topic: Equity and Debt Securities

Elise Tremblay’s bond ladder

Elise Tremblay, 64, sold her veterinary practice last year and plans to retire in six months. Her defined benefit pension will cover basic living costs, but she wants part of her registered assets to provide more predictable cash flow than her current balanced fund. Her advisor recommends moving $300,000 of her RRSP into a 5-year ladder of individual bonds. Elise expects to convert the RRSP to a RRIF next year.

Two facts shape the recommendation. First, Elise wants one tranche to generate stronger annual coupon income so she can avoid selling equities in weak markets. Second, she may need about $75,000 in 18 months for a condo down payment if she decides to move. She is comfortable holding the other tranches to maturity. All bond candidates below are non-callable, investment-grade, and acceptable under her IPS. Assume taxes are not the deciding issue because the purchases will be inside her registered plan, and assume market yields and credit spreads stay unchanged unless a question states otherwise.

Elise also says that, for one optional tranche, she likes the idea of buying below face value even if the coupon is lower, because she understands the price should move toward par as maturity approaches.

Exhibit: 5-year bond candidates

Question 5

For the tranche Elise expects to hold to maturity to generate the strongest annual cash flow, which bond is most suitable?

• A. Harbour Bank senior note
• B. Any of the three bonds
• C. Northern Provincial agency bond
• D. Maple Logistics debenture

Best answer: A

What this tests: Equity and Debt Securities

Explanation: A premium-priced bond is most suitable when the client wants stronger current coupon income and plans to hold to maturity. Harbour Bank’s coupon is above the market yield, so Elise pays above par but receives the largest annual cash flow.

When maturity and required yield are comparable, the bond with the higher coupon will trade at a premium and deliver more cash income each year. That is the key issue here because Elise wants this tranche to support spending and reduce the need to sell equities in weak markets. Harbour Bank’s 6.0% coupon is above the 4.9% market yield, so its price rises above par to balance that extra coupon income. Inside Elise’s registered plan, the case does not give any tax reason to avoid that higher coupon stream. The par bond is more neutral, while the discount bond shifts more of the return away from current income and toward price accretion by maturity.

• Same yield, different pattern: identical market yields do not make the bonds interchangeable because coupon timing differs.
• Par is neutral: the par bond matches market yield but does not add the higher coupon cash flow Elise wants.
• Discount shifts return: the discount bond gives less current income and relies more on price accretion toward par.

Its 6.0% coupon exceeds the 4.9% market yield, so it is premium-priced and provides the strongest annual coupon cash flow.

Question 6

For the $75,000 that may be liquidated in about 18 months, assuming yields are unchanged, which bond best minimizes dependence on pull-to-par?

• A. Maple Logistics debenture
• B. Harbour Bank senior note
• C. Any of the three bonds
• D. Northern Provincial agency bond

Best answer: D

What this tests: Equity and Debt Securities

Explanation: A par-priced bond is most relevant when the client may sell before maturity and wants the result to be least affected by mechanical price drift. Northern Provincial sits at par, so there is minimal built-in pull upward or downward toward face value.

Pull-to-par matters most when a bond is purchased above or below face value and then sold before maturity. If yields and credit spreads stay unchanged, a premium bond will tend to drift downward toward par, while a discount bond will tend to drift upward. A par bond starts with neither effect, so its interim value is less shaped by premium amortization or discount accretion. That makes the Northern Provincial bond the cleanest fit for money Elise may need in 18 months. This does not mean par bonds always have the lowest market risk; it means par pricing is the least dependent on that specific pull-to-par effect under the assumption given.

• Premium drift: a premium bond offers higher coupons, but part of that benefit is offset by price moving down toward par.
• Discount accretion: a discount bond can rise toward par, so interim value depends more on that built-in price lift.
• Equal YTM misconception: similar yields do not eliminate the different price paths created by premium, par, and discount pricing.

At par, it has the least built-in premium amortization or discount accretion, so interim value is least driven by pull-to-par.

Question 7

If Elise wants to buy below face value and accepts lower coupon income so that price accretion becomes a larger part of return, which bond best fits?

• A. Harbour Bank senior note
• B. Northern Provincial agency bond
• C. Maple Logistics debenture
• D. Any of the three bonds

Best answer: C

What this tests: Equity and Debt Securities

Explanation: A discount-priced bond best matches a client who wants to buy below face value and is comfortable receiving less coupon income. Maple Logistics fits because its coupon is below the required market yield, so the bond trades under par and can accrete upward by maturity.

A bond trades at a discount when its coupon rate is lower than the market yield required for that maturity and risk level. Investors therefore pay less than face value, and part of the expected return comes from the bond’s price moving back toward par as maturity approaches, assuming credit conditions hold. That matches Elise’s stated preference for one optional tranche: she likes the idea of buying below face value and accepts a lower annual coupon. The trade-off is important: discount pricing does not create a free gain, because the lower purchase price mainly offsets the lower coupon stream. It is suitable here only because that cash-flow pattern matches her stated preference.

• Premium is the opposite: buying above par gives higher coupon income but not the below-face-value entry Elise asked for.
• Par is neutral: a par bond has no built-in discount accretion because coupon and market yield are aligned.
• Preference matters: the correct choice is driven by Elise’s comfort with lower current income in exchange for buying below par.

Its 3.6% coupon is below the 4.9% market yield, so it trades below par and can accrete toward par over time.

Question 8

Why is the Northern Provincial agency bond priced at par in the exhibit?

• A. Its coupon exceeds the market yield
• B. Par pricing depends only on face value
• C. Its coupon is below the market yield
• D. Its coupon matches the market yield

Best answer: D

What this tests: Equity and Debt Securities

Explanation: Par pricing occurs when the bond’s coupon rate and the market’s required yield are the same. In the exhibit, both figures are 4.9%, so the bond trades at $100 per $100 face value.

Bond pricing is driven by the relationship between coupon rate and required market yield. When those two rates are equal for a given maturity and risk level, the present value of the coupon stream and maturity value equals face value, so the bond trades at par. That is exactly what the exhibit shows for the Northern Provincial agency bond: 4.9% coupon and 4.9% market yield. If the coupon were higher than the required yield, investors would pay above par to receive that richer coupon stream. If the coupon were lower, the price would fall below par to compensate for the weaker coupons.

• Above-market coupon: that relationship creates premium pricing, not par pricing.
• Below-market coupon: that relationship creates discount pricing, not par pricing.
• Face value alone: maturity value is fixed, but the market still re-prices the bond based on coupon versus required yield.

A bond trades at par when its coupon rate equals the required market yield for that maturity and risk.

Case 3

Topic: Equity and Debt Securities

Maya Chen’s fixed-income redesign

Maya Chen, 67, is a widowed retired pharmacist in Vancouver. She has no debt, an indexed defined-benefit pension, and CPP/OAS that together cover about $70,000 of her $96,000 annual spending. The rest comes from her investment portfolio. She expects to buy a smaller condo in about 10 months and will need about $320,000 for the down payment, legal fees, and moving costs. She also wants a separate $150,000 reserve that her executor could use with minimal volatility if final tax, probate-related expenses, or home repairs arise before her current house is sold.

Maya tells her advisor: “I do not want to make an interest-rate bet with money I will need soon, and I do not want credit surprises in my executor reserve. For the remainder of my fixed income, I want dependable maturities and cash flow without trying to predict rates.”

Any fixed-income assets not assigned to the condo or executor reserve will remain part of her retirement-withdrawal bucket.

Exhibit: Current fixed-income holdings

Her diversified equity portfolio remains unchanged. Today’s review is only about redesigning the fixed-income sleeve, and Maya is willing to accept slightly lower yield if the structure better matches each goal.

Question 9

Which fixed-income adjustment best suits the $320,000 condo-purchase amount?

• A. Keep it in the long corporate fund
• B. Shift it to short-duration, high-quality holdings
• C. Use high-yield bond ETFs instead
• D. Extend it into longer provincial bonds

Best answer: B

What this tests: Equity and Debt Securities

Explanation: The condo money has a known 10-month liability date, so the priority is limiting price volatility from interest-rate moves and avoiding unnecessary credit risk. A short-duration, high-quality bucket best matches that purpose.

Shorter duration is most appropriate when capital will be needed in the near term. Maya’s condo purchase is only about 10 months away, so the fixed-income job is capital preservation and liquidity, not maximizing yield. An 11.1-year BBB corporate fund could lose value if yields rise and could also widen in spread before the purchase date. Moving that bucket to short-duration, higher-quality holdings such as very short government bonds, insured GICs, or cash-like instruments better aligns asset behavior with the liability date. Reaching for longer maturity or lower credit quality would expose a known near-term use of funds to avoidable volatility.

• Yield chasing: Staying in long corporates or extending maturity seeks extra income but ignores the 10-month liability date.
• Credit stretch: High-yield exposure adds default and spread risk where certainty of principal matters most.
• Liability matching: Near-term spending needs call for low duration and low volatility rather than maximum yield.

The condo liability is close-dated, so lower duration and stronger credit quality best protect principal.

Question 10

If Maya’s main concern for the executor reserve is avoiding credit events, what is the best adjustment?

• A. Concentrate in BBB corporate bonds
• B. Add callable corporate issues
• C. Extend maturities to lock in higher yields
• D. Use only high-quality government or insured issuers

Best answer: D

What this tests: Equity and Debt Securities

Explanation: When the stated risk is a credit event, the key adjustment is stronger issuer quality. For Maya’s executor reserve, dependable principal matters more than squeezing out extra yield.

Higher credit quality is most appropriate when a fixed-income bucket exists as a backstop against a funding failure. Maya’s executor reserve may be needed before the house sale closes, so a downgrade, spread widening, or default at the wrong time would defeat the reserve’s purpose. Using federal or provincial bonds, CDIC-insured GICs, or other very strong issuers reduces credit risk and usually lowers spread volatility. Extending maturity may change yield, and call features change cash-flow patterns, but neither solves the stated concern as directly as stronger credit quality. When the main risk to avoid is issuer impairment, quality comes first.

• Wrong risk focus: Extending maturity addresses yield opportunities, not fear of a credit event.
• Quality mismatch: BBB corporates may pay more, but they introduce exactly the downgrade and spread risk Maya wants to avoid.
• Feature mismatch: Callability affects reinvestment uncertainty, not the issuer-strength problem.

Higher credit quality directly reduces default and credit-spread risk in a reserve meant to be dependable.

Question 11

For Maya’s remaining fixed income, which strategy best matches her desire for dependable maturities without making a rate call?

• A. Maintain a staggered 1-to-5-year ladder
• B. Switch to cash and 20-year corporates
• C. Use perpetual preferred shares
• D. Concentrate in one 7-year debenture

Best answer: A

What this tests: Equity and Debt Securities

Explanation: A laddered approach fits when the client wants predictable maturities, recurring liquidity, and less dependence on a single interest-rate forecast. That matches Maya’s withdrawal bucket after the condo and executor reserves are carved out.

A ladder is most appropriate when the client needs ongoing access to capital over several years but does not want to make a strong call on future interest rates. By spreading maturities across one to five years, Maya gets regular principal coming due for spending or reinvestment. That reduces reinvestment concentration compared with putting everything in one term and avoids the long-end volatility of a cash-plus-20-year barbell. Perpetual preferred shares can provide income, but they do not behave like core high-quality fixed income. The ladder gives structure, diversification across maturity dates, and flexibility for a retirement-withdrawal bucket.

• Single maturity bet: One 7-year debenture concentrates timing risk and offers fewer natural liquidity points.
• Volatility jump: A cash-plus-20-year barbell adds long-end sensitivity that does not fit a core withdrawal bucket.
• Wrong instrument: Perpetual preferred shares are income-oriented but are not a substitute for a disciplined core bond ladder.

A ladder provides recurring maturities and spreads rate risk across time without requiring one yield forecast.

Question 12

After the condo purchase, one ladder rung matures and no cash is currently needed. What should the advisor recommend?

• A. Leave it permanently in cash
• B. Roll it into the shortest rung
• C. Move it to the long corporate fund
• D. Buy a new longest rung

Best answer: D

What this tests: Equity and Debt Securities

Explanation: A ladder works through disciplined staggering of maturities. If Maya does not need the proceeds, reinvesting the maturing rung at the long end preserves the ladder and keeps reinvestment timing diversified.

A bond or GIC ladder should normally be maintained, not allowed to collapse, unless the client has a current cash need. When one rung matures, reinvesting the proceeds into a new longest rung restores the staggered maturity pattern and keeps regular future maturities available. This process spreads interest-rate exposure through time rather than concentrating everything at the very short end or making a single large duration decision. Leaving the money in cash or moving it into a long BBB fund changes the strategy instead of preserving it. The value of laddering comes from the repeatable discipline of rolling maturities forward.

• Short-end drift: Reinvesting only in the shortest rung gradually collapses the ladder and clusters future rollover dates.
• Strategy change: Moving proceeds into the long corporate fund abandons the ladder’s balanced maturity structure and adds BBB duration risk.
• Idle cash: Permanent cash may be fine for a known spending need, but not when the goal is to keep the ladder working.

Replacing the matured rung at the long end preserves the ladder’s staggered maturity pattern.

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