Characteristics Flashcards
(57 cards)
1
Q
Fund of Hedge Fund
A
A portfolio of shares in different hedge funds
2
Q
Coverdell Education Saving Account (CESA)
A
- A tax-free investment account established to help pay a child’s education expenses
- Income limits are imposed on contributors
- Withdrawals are tax-free if used for qualified education expenses (at any level of education)
- Penalties and taxes are assessed if the funds are not used for education
- Change of beneficiary is allowed
3
Q
529 College Savings Plan
A
- A tax-free investment account established to help pay higher education expenses and private school (K through 12) tuition ($10,000 per year)
- No income limits are imposed on contributors
- Withdrawals are tax-free if the funds are used for qualified education expenses
- Penalties and taxes are assessed if the funds are not used for education
- Change of beneficiary is allowed
4
Q
Real Estate Investment Trust
A
- A portfolio consisting of income producing properties and/or mortgages
- Distributes 90% of its net income to investors, but doesn’t distribute losses
- Dividends are taxed as ordinary income (non-qualified)
- Not considered an investment company
5
Q
Hedge Fund
A
- A private investment fund that’s not subject to the Investment Company Act of 1940 (i.e., NOT an investment company)
- May use exotic strategies that involve short selling, leverage, and derivatives
- Doesn’t publish its daily NAV; illiquid
6
Q
Variable Annuity
A
- An investment contract with an insurance company; risk assumed by annuitant
- Can be set up to provide periodic payments for life
- Income grows tax-deferred until paid out
- Risk and return are based on the investments chosen in the separate account (investments may be adjusted to suit the investor’s age and risk profile)
7
Q
Fixed Annuity
A
- An investment contract with an insurance company, risk assumed by ins. company
- May provide fixed payments for life
- Income grows tax-deferred until paid out
- The investment return is at a fixed rate
8
Q
Individual Retirement Account
A
- A tax deferred investment account; may be funded by persons with earned income
- Withdrawals are taxed as ordinary income
- Penalty is assessed for early withdrawal
- RMD applies
9
Q
ROTH IRA
A
- A tax-free investment account available to persons with earned income
- Income limits are imposed on contributors (not available for high income persons)
- Qualified withdrawals are tax-free
- Penalty is assessed for early withdrawal
- RMD doesn’t apply
10
Q
Balanced Fund
A
- A diversified and managed portfolio that consists of both stocks and bonds
- Provides both growth and current income
11
Q
International Stock Fund
A
- A managed portfolio that consists of stocks of foreign corporations
- Shares are priced in U.S. dollars, with dividends paid in U.S. dollars
12
Q
Index Fund
A
- A passively managed fund that buys and holds securities that mirror a specific index (e.g., the S&P 500)
- Low expense ratio
13
Q
Exchange Traded Fund
A
- Offers shares that track an index and trade in the secondary market like common stock
- Unlike mutual funds, shares are priced and traded in real-time on an exchange
- May be sold short and purchased on margin
- Variations include high risk leveraged and inverse ETFs
14
Q
Exchange Traded Note
A
- Similar to an ETF; however, it’s considered unsecured debt; subject to default risk
- Often tracks the performance of an exotic mix of assets (e.g., foreign stocks and illiquid markets)
- May be sold short and purchased on margin
15
Q
Closed Ended Fund
A
- Issues a limited number of shares which are priced and traded in real-time (not redeemable)
- Share price is not based on NAV; instead, it’s set in market by supply and demand
16
Q
Business Development Company (BDC)
A
- A registered closed-end investment company that invests in developing companies (often private companies and startups that are not available to the average investor)
- More volatile than most mutual funds, with high potential reward
17
Q
Covered Put
A
- The sale of a put against a short stock position
- Generates income, but limits the potential gains on the short if it declines and the put is exercised
- The potential loss is unlimited since the stock’s value could rise an infinite amount
18
Q
Direct Participation Program (DPP) Limited Partnership
A
- Distributes passive income and passive losses to its partners
- May provide tax deductions and tax credits
- Offers limited liability to limited partners
- Illiquid and subject to the adverse effects of tax law changes
- Risk of IRS recapturing tax benefits
19
Q
Mutual Fund
A
- Offers shares of a portfolio that’s diversified based on the type of fund
- Less risky and easier than buying individual securities
- Priced once per day (forward pricing)
- Fund will redeem shares at NAV; there’s no secondary market
- Suitability varies based on objectives and share class
20
Q
Growth Fund
A
- A managed portfolio consisting of common stocks which have strong upside potential
- May pay little or no dividends
- Risk is determined by types of companies included (large-, mid-, small-cap)
21
Q
Income Fund
A
- A managed portfolio that primarily consists of bonds, preferred stocks, and possibly high dividend paying common stocks
- Price is less volatile than growth funds
- Offers a high dividend yield
22
Q
Specialized/Sector Fund
A
- A managed portfolio that invests in one specific industry or geographic area
- The least diversified type of fund
- Higher risk with higher potential retums
23
Q
Debit Spreads
A
- The sale and purchase of the same type of option on the same stock
- The premium paid is greater than the premium received (creating a net debit)
- The net premium is the buyer’s maximum loss, while the maximum gain is the difference in the strike prices minus the net premium (gain and loss are limited)
24
Q
Credit Spread
A
- The sale and purchase of the same type of option on the same stock
- The premium received is greater than the premium paid (creating a net credit)
- The net premium is the seller’s maximum gain, while the maximum loss is the difference in the strike prices minus the net premium (gain and loss are limited)
25
Protective Put
- A put purchased on a long stock position
- Used to significantly protect (hedge) the downside risk of the stock
- If the stock falls in value, the option position will gain value
26
Covered Call
- A call sold against a long stock position
- Generates income (the premium) and lowers the cost of the stock by the premium received
- Upside potential is limited (if the call is exercised), while the downside risk is still substantial
27
Protective Call
- A call purchased to hedge a short stock position
- Used to significantly protect (hedge) the upside risk of the stock position
- If the stock rises in value, the option position will gain value
28
Z Tranche
- The last CMO tranche to be paid (longest maturity)
- Receives no payments until all other tranches have been paid off
29
Long Options (Buying Calls or Puts)
- Allows investors to speculate on the price movement of a stock without the capital outlay of buying the shares outright
- Unlike stock purchases, options are short-term and may expire worthless
30
Short Options (Selling Calls or Puts)
- Option seller accepts potential future obligation in exchange for premium income
- Income is limited to the premium (if the option expires worthless)
- Potential future loss may be substantial, or even unlimited
31
Long Straddle or Long Combination
- Buying both a call and a put on the same stock to speculate on price volatility
• Straddle = same stock, expiration, and strike price
• Combination = same stock, with different expirations and/or strike prices
- Loss of combined premiums occurs if price remains stable
32
Short Straddle or Short Combination
- Selling both a call and a put on the same stock to generate income of the combined premiums
• Straddle = same stock, expiration, and strikes
• Combination = same stock, with different expirations and/or strikes
- Potential future loss may be substantial or even unlimited
33
Treasury Inflation Protected Securities
- A conservative long-term income investment which provides protection from inflation (purchasing power) risk
- Pays a low rate of interest at a fixed rate, but is based on a principal amount that's adjusted for inflation (the income is therefore variable)
34
Treasury STRIPS
- Safe and conservative investment created from T-notes and T-bonds that had their interest and principal payments separated and resold as zero-coupon securities
- Pays a fixed lump-sum at maturity
- Offer a wide range of maturities from 2 to 30 yrs
- Subject to inflation (purchasing power) risk
35
Government Agency Mortgage Backed Securities
- Pass through debt certificates that make monthly payments of both principal and interest (fully taxable) which are derived from residential mortgage payments
- Issued by federal agencies or government-sponsored enterprises; considered AAA rated
- Due to prepayment risk (mortgages being paid off early), the maturity is uncertain
36
Collateralized Mortgage Obligation (CMO)
- Privately issued, mortgage-backed bond that uses the principal and interest collected on mortgages to fund various bond classes (tranches); provides monthly income
37
Planned Amoritization Class (PAC)
- A CMO tranche that provides investors with the most predictable payments (i.e., the least prepayment risk)
38
Support/Companion Tranche
- A CMO tranche which has the most prepayment risk, variability in payments, and unpredictable maturity
39
Private Activity/ Industrial
Development Bond
- Issued by municipalities to help expand economic development
- All or part of the bond proceeds benefit a private entity or corporation
- Rating is based on the entity/corporation
- For investors who are subject to the AMT, the interest may be taxable; therefore, it typically pays a higher interest rate
40
Municipal Note
- Safe and liquid short-term municipal debt (typically a money market instrument)
- Pays federally tax-exempt interest
- Offers a low yield
- Examples include: RAN, TAN, BAN, GAN
41
Auction Rate Security
- Long-term investment with short-term features
- Interest rates/dividends are reset at frequent intervals through an auction
42
Variable Rate Demand Obligation (VRDO)
- Long-term debt with short-term trading features
- Lower yield, but greater liquidity than an auction rate security
- Interest rate is reset to current short-term rate periodically (e.g., weekly or monthly)
- Investor may put bond to issuer at reset
43
Treasury Note and Treasury Bond
- Low risk of default; low interest payments
- Subject to inflation and interest-rate risk
- Note maturities are from 2-10 years
- Bond maturities exceed 10 years
- Interest income is exempt from state and local tax (subject to federal)
44
Treasury Bill
- Short-term and liquid (a money-market instrument)
- Safe investment with low yield
- Maturities of up to one year
45
Corporate Bond
- May be secured or unsecured
- Price fluctuation is influenced by length of maturity and interest rate/coupon
- Interest rate is generally fixed and the interest is fully taxable
46
Convertible Bond
- Convertible into a fixed number of common shares
- Offers lower interest rate than non-convertibles
- For parity purposes, its price is influenced by the value of the underlying stock
47
Zero-Coupon Bond
- Issued at a deep discount, but matures at par value
- Makes no interest payments
- Bond's basis is accreted and treated as interest income
- Discount is taxed annually for corporates, and tax-exempt for municipal (OID) bonds
- Has a high degree of interest-rate and inflation risk, but no reinvestment risk
48
High-Yield Bond (Junk Bond)
- High risk bond with a speculative rating
- Offers a higher coupon
- Includes Income (Adjustment) Bond
49
Money Market Instrument
- Short-term debt (one year or less to maturity) with very low yields
- Very safe and liquid investments
- Examples include commercial paper (CP), bankers' acceptance (BA), short-term negotiable CDs, repurchase agreements (REPOS)
50
Municipal Bond
- Pays federally tax-exempt interest
- Price fluctuation is influenced by length of maturity and interest rate
- G.O. bonds typically have less credit risk than revenue bonds
- Due to tax exemption, pays lower coupon than a comparable corporate bond
51
Common Stock
- Corporate ownership
- May pay dividends
• Large Cap: least volatility/least growth potential
• Mid Cap: more volatility/more growth potential
• Small Cap: most volatility/most growth potential
52
Preferred Stock
- Pays fixed dividend, but doesn't share in earings growth
- Receives dividends before common
- Has no voting or preemptive rights
- Subject to inflation (purchasing power) risk and interest-rate risk
53
Growth Stock
- More volatile (risky) than most stocks; has a high beta
- Offers little or no dividend income
- Low dividend payout ratio and high P/E ratio
54
Utility Stock
- Company has stable earnings and the stock is less risky than most stocks (has a low beta)
- High dividend payout and low P/E ratio
55
American Depositary Receipt (ADR)
- A receipt of ownership (equity) in a foreign corporation
- Trades in the U.S. market and in U.S. dollars
- Must be SEC registered, unless exempt
- Subject to market and exchange-rate risk
- May pay dividends
56
Bond
- Provides stable (fixed) interest income
- Conservative, less risky than equities
- Subject to inflation (purchasing power) risk, interest-rate (market) risk, default (credit) risk, reinvestment risk
- Longer maturities have more risk
57
L Shares
A relatively new product is variable annuity L shares, which are referred to as short surrender securities. L shares have deferred sales charges that decline to zero in three to four years and are designed for customers who may be considering an exchange in the future.
