Products, Characteristics, and Suitability Flashcards
(147 cards)
1
Q
What type of interest do municipal bonds pay?
A
Federally tax-exempt interest
Municipal bonds are attractive to investors seeking tax-free income.
2
Q
What factors influence the price fluctuation of municipal bonds?
A
Length of maturity and interest rate
Longer maturities and changing interest rates can lead to significant price changes.
3
Q
Which type of municipal bond typically has less credit risk?
A
G.O. bonds
G.O. bonds are backed by the issuing municipality’s credit and taxing power.
4
Q
Why do municipal bonds pay lower coupons compared to corporate bonds?
A
Due to tax exemption
The interest from municipal bonds is tax-free, allowing for lower interest payments.
5
Q
Who are municipal bonds suitable for?
A
Investors in high tax brackets seeking tax-exempt interest income
These investors benefit more from the tax-exempt feature.
6
Q
Should municipal bonds be included in an IRA or other tax-deferred account?
A
No
The tax benefits of municipal bonds are not utilized effectively in tax-deferred accounts.
7
Q
What is common stock?
A
Corporate ownership that may pay dividends
Common stock represents ownership in a corporation and typically comes with voting rights.
8
Q
What characterizes Large Cap stocks?
A
Least volatility and least growth potential
Large Cap stocks are typically companies with a market capitalization of over $10 billion.
9
Q
What are the characteristics of Mid Cap stocks?
A
More volatility and more growth potential
Mid Cap stocks generally refer to companies with a market capitalization between $2 billion and $10 billion.
10
Q
What defines Small Cap stocks?
A
Most volatility and most growth potential
Small Cap stocks usually refer to companies with a market capitalization of under $2 billion.
11
Q
Who are suitable investors for common stocks?
A
Investors seeking long-term growth (capital appreciation) and the opportunity to outpace inflation
Common stocks are ideal for those looking to invest over a longer time horizon.
12
Q
What type of dividend does Preferred Stock pay?
A
Fixed dividend
13
Q
Does Preferred Stock share in earnings growth?
A
No
14
Q
Who receives dividends before common stockholders?
A
Preferred Stockholders
15
Q
What rights do Preferred Stockholders lack?
A
Voting or preemptive rights
16
Q
What risks is Preferred Stock subject to?
A
Inflation risk and interest-rate risk
17
Q
Who is Preferred Stock suitable for?
A
Investors seeking stable dividend income with returns comparable to long-term bonds
18
Q
What is a growth stock?
A
More volatile (risky) than most stocks
19
Q
What does a growth stock typically offer in terms of dividend income?
A
Little or no dividend income
20
Q
What is the typical dividend payout ratio for growth stocks?
A
Low dividend payout ratio
21
Q
What is the typical P/E ratio for growth stocks?
A
High P/E ratio
22
Q
Who are growth stocks suitable for?
A
Investors seeking long-term growth and retirement savings
23
Q
What is a benefit of growth stocks related to inflation?
A
Good hedge against inflation
24
Q
Are growth stocks suitable for short-term investing?
A
No, they are unsuitable due to greater volatility
25
Fill in the blank: Growth stocks are more _______ than most stocks.
volatile
26
True or False: Growth stocks provide high dividend income.
False
27
What does ADR stand for?
American Depositary Receipt
28
What does an ADR represent?
A receipt of ownership (equity) in a foreign corporation
29
In which market do ADRs trade?
In the U.S. market
30
In what currency do ADRs trade?
In U.S. dollars
31
Are ADRs required to be SEC registered?
Yes, unless exempt
32
What types of risks are associated with ADRs?
Market and exchange-rate risk
33
Can ADRs pay dividends?
Yes
34
Who are ADRs suitable for?
Investors seeking to invest in foreign companies
35
What are some examples of risks associated with investing in foreign companies?
Political risk; exchange risk
36
What type of income do bonds provide?
Stable (fixed) interest income
37
How do bonds compare to equities in terms of risk?
Conservative, less risky than equities
38
What are the risks associated with bonds? List them.
* Inflation (purchasing power) risk
* Interest-rate (market) risk
* Default (credit) risk
* Reinvestment risk
39
What is the relationship between bond maturities and risk?
Longer maturities have more risk
40
Who are bonds most suitable for?
Older and/or more conservative investors who want consistent income
41
Are bonds suitable for investors seeking growth investments? True or False?
False
42
What is a Convertible Bond?
Convertible into a fixed number of common shares
43
How does the interest rate of a Convertible Bond compare to non-convertible bonds?
Offers lower interest rate than non-convertibles
44
What influences the price of a Convertible Bond for parity purposes?
The value of the underlying stock
45
Who are Convertible Bonds suitable for?
Investors seeking income with the potential for long-term growth
46
What are the characteristics of Convertible Bonds?
* Relative safety of a bond
* Growth potential of the underlying stock
47
What is a Zero-Coupon Bond?
Issued at a deep discount, but matures at par value.
48
Do Zero-Coupon Bonds make interest payments?
No, they make no interest payments.
49
How is the basis of a Zero-Coupon Bond treated for tax purposes?
The bond’s basis is accreted and treated as interest income.
50
How is the discount on Zero-Coupon Bonds taxed for corporates?
Discount is taxed annually for corporates.
51
What is the tax status of the discount on municipal Zero-Coupon Bonds?
The discount is tax-exempt for municipal (OID) bonds.
52
What risks are associated with Zero-Coupon Bonds?
High degree of interest-rate and inflation risk, but no reinvestment risk.
53
Who are Zero-Coupon Bonds suitable for?
Investors seeking less risky investments than equities and predictable growth.
54
What are common uses for Zero-Coupon Bonds?
Used for retirement planning or college funding.
55
What is a High-Yield Bond also known as?
Junk Bond
56
What type of rating does a High-Yield Bond have?
Speculative rating
57
What advantage does a High-Yield Bond offer?
Higher coupon
58
What type of bond is included under High-Yield Bonds?
Income (Adjustment) Bond
59
Who is a High-Yield Bond suitable for?
High-risk, speculative investors
60
True or False: High-Yield Bonds are considered low risk.
False
61
What are money market instruments?
Short-term debt with very low yields and low maturity risk.
62
What is the typical maturity period for money market instruments?
One year or less.
63
What are the characteristics of money market instruments?
Very safe and liquid investments.
64
Name two examples of money market instruments.
* Commercial paper (CP)
* Bankers’ acceptance (BA)
65
What is a suitable use for money market instruments?
To hold funds safely until needed or invested for a longer term.
66
Who are the ideal investors for money market instruments?
Investors seeking conservative investments for short-term needs.
67
Are money market instruments suitable for long-term growth?
No, they are unsuitable for investors seeking long-term growth and/or income.
68
Fill in the blank: Money market instruments are used to hold funds safely until _______.
[needed or invested for a longer term]
69
What is the yield profile of money market instruments?
Very low yields.
70
What type of investment risk do money market instruments typically have?
Very low maturity risk.
71
What type of interest does a Municipal Bond pay?
Federally tax-exempt interest
## Footnote
Municipal bonds are often attractive to investors looking to minimize tax liabilities.
72
What factors influence the price fluctuation of Municipal Bonds?
Length of maturity and interest rate
## Footnote
Longer maturities typically have more price sensitivity to interest rate changes.
73
Which type of Municipal Bond typically has less credit risk?
G.O. bonds
## Footnote
G.O. stands for General Obligation bonds, which are backed by the issuing municipality's taxing power.
74
What is a common characteristic of Municipal Bonds compared to corporate bonds?
Pays lower coupon due to tax exemption
## Footnote
The tax-exempt status allows municipalities to offer lower interest rates than corporate issuers.
75
Who are Municipal Bonds suitable for?
Investors in high tax brackets seeking tax-exempt interest income
## Footnote
These investors benefit more from the tax advantages offered by municipal bonds.
76
Should Municipal Bonds be included in an IRA or other tax-deferred account?
No
## Footnote
Including tax-exempt bonds in tax-deferred accounts does not provide additional tax benefits.
77
What is a Private Activity/Industrial Development Bond?
A bond issued by municipalities to help expand economic development
78
Who benefits from the proceeds of a Private Activity/Industrial Development Bond?
A private entity or corporation
79
On what basis is the rating of a Private Activity/Industrial Development Bond determined?
Based on the entity or corporation
80
What is the tax implication for investors subject to the AMT regarding the interest from these bonds?
The interest may be taxable
81
Why does a Private Activity/Industrial Development Bond typically pay a higher interest rate?
Because the interest may be taxable for investors subject to the AMT
82
Who is suitable for investing in a Private Activity/Industrial Development Bond?
Investors seeking a higher yielding municipal bond and are not subject to the AMT
83
What type of debt does a Municipal Note represent?
Safe and liquid short-term municipal debt
## Footnote
Typically a money market instrument
84
What type of interest do Municipal Notes pay?
Federally tax-exempt interest
85
What is the yield characteristic of Municipal Notes?
Offers a low yield
86
Name three examples of Municipal Notes.
* RAN
* TAN
* BAN
* GAN
87
Who are Municipal Notes suitable for?
Investors in high tax brackets who are investing for short-term needs
88
What is an Auction Rate Security?
A long-term investment with short-term features.
89
How are interest rates/dividends determined for Auction Rate Securities?
They are reset at frequent intervals through an auction.
90
Who is an ideal investor for Auction Rate Securities?
Conservative investors seeking income.
91
Who is not suitable for investing in Auction Rate Securities?
Investors seeking growth and liquidity.
92
What does VRDO stand for?
Variable Rate Demand Obligation
93
What type of debt is a VRDO?
Long-term debt with short-term trading features
94
What is the yield comparison of VRDOs to auction rate securities?
Lower yield, but greater liquidity
95
How often is the interest rate on a VRDO reset?
Periodically (e.g., weekly or monthly)
96
What option does an investor have at the reset of a VRDO?
Investor may put bond to issuer at reset
97
Who are VRDOs suitable for?
Conservative investors seeking income
98
Are VRDOs suitable for investors seeking growth?
Unsuitable
99
Fill in the blank: A VRDO has a _______ yield than an auction rate security.
lower
100
True or False: VRDOs provide greater liquidity than auction rate securities.
True
101
What is the primary characteristic of Treasury Notes and Treasury Bonds?
Low risk of default and low interest payments
## Footnote
Treasury securities are considered safe investments due to the backing of the U.S. government.
102
What type of risk are Treasury Notes and Treasury Bonds subject to?
Inflation and interest-rate risk
## Footnote
These risks can affect the real return on investment.
103
What are the maturity ranges for Treasury Notes?
2-10 years
## Footnote
Treasury Notes are issued with various maturities within this range.
104
What is the maturity for Treasury Bonds?
Exceeds 10 years
## Footnote
Treasury Bonds typically have longer maturities than Treasury Notes.
105
What tax exemption applies to the interest income from Treasury securities?
Exempt from state and local tax (subject to federal tax)
## Footnote
This makes Treasury securities more attractive for certain investors.
106
Who are Treasury Notes and Treasury Bonds suitable for?
Investors seeking fixed income and safety of principal
## Footnote
These securities are ideal for conservative investors.
107
What is a Treasury Bill?
A short-term and liquid money-market instrument
108
What type of investment is a Treasury Bill considered?
A safe investment with low yield
109
What are the maturities of Treasury Bills?
Up to one year
110
Who is a Treasury Bill suitable for?
Investors seeking absolute safety of principal who are willing to accept a very low return
111
Fill in the blank: Treasury Bills are a money-market instrument that is _______.
short-term and liquid
112
True or False: Treasury Bills offer high yields.
False
113
What does TIPS stand for?
Treasury Inflation-Protected Securities
114
What type of investment is TIPS?
A conservative long-term income investment
115
What risk does TIPS provide protection against?
Inflation (purchasing power) risk
116
What type of interest rate do TIPS pay?
A low fixed rate
117
How is the principal amount of TIPS adjusted?
It is adjusted for inflation
118
Is the income from TIPS fixed or variable?
Variable
119
Who is TIPS suitable for?
Investors seeking a hedge against inflation
120
Fill in the blank: TIPS pays a low rate of interest at a _______ rate.
fixed
121
What are 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
## Footnote
Treasury STRIPS stands for Separate Trading of Registered Interest and Principal Securities.
122
What type of payment do Treasury STRIPS provide?
Pays a fixed lump-sum at maturity
123
What is the range of maturities for Treasury STRIPS?
From 2 to 30 years
124
What risk are Treasury STRIPS subject to?
Inflation (purchasing power) risk
125
Who are Treasury STRIPS suitable for?
Investors seeking to receive a fixed sum of money to satisfy a future expense (for long-term saving, planning for retirement, or college funding)
126
Fill in the blank: Treasury STRIPS are created from T-notes and T-bonds that had their interest and principal payments _______.
separated and resold as zero-coupon securities
127
True or False: Treasury STRIPS provide regular income payments.
False
128
What is the primary purpose of investing in Treasury STRIPS?
To receive a fixed sum of money at maturity for future expenses
129
What are Government Agency Mortgage Backed Securities?
Pass through debt certificates that make monthly payments of both principal and interest (fully taxable) derived from residential mortgage payments
## Footnote
These securities are backed by federal agencies or government-sponsored enterprises.
130
What type of rating do Government Agency Mortgage Backed Securities typically have?
AAA rated
## Footnote
This rating indicates a high level of safety and low credit risk.
131
What is a risk associated with Government Agency Mortgage Backed Securities?
Prepayment risk
## Footnote
This refers to the risk of mortgages being paid off early, resulting in uncertain maturity.
132
Who are suitable investors for Government Agency Mortgage Backed Securities?
Investors seeking safety, monthly interest income, and a yield slightly higher than U.S. Treasuries
## Footnote
These investors value the relative safety and income these securities provide.
133
True or False: Government Agency Mortgage Backed Securities are considered fully taxable.
True
## Footnote
This means that interest income from these securities is subject to federal income tax.
134
What kind of payments do Government Agency Mortgage Backed Securities make?
Monthly payments of both principal and interest
## Footnote
This structure provides a regular income stream to investors.
135
What is a Collateralized Mortgage Obligation (CMO)?
A privately issued, mortgage-backed bond that uses the principal and interest collected on mortgages to fund various bond classes (tranches)
## Footnote
CMOs are structured to provide different risk and return profiles based on the tranches.
136
What type of income do CMOs provide?
Monthly income
## Footnote
This feature makes CMOs attractive to certain types of investors.
137
Who are CMOs suitable for?
Investors seeking monthly income and customized prepayment risk
## Footnote
Investors can choose tranches based on their risk tolerance and income needs.
138
What are the components used to fund CMO tranches?
Principal and interest collected on mortgages
## Footnote
This mechanism ties the performance of the CMO to the underlying mortgage loans.
139
Fill in the blank: A CMO provides ____ income.
monthly
## Footnote
This is a key feature that differentiates CMOs from other types of investments.
140
True or False: CMOs are appropriate for all types of investors.
False
## Footnote
CMOs are specifically tailored for certain investor profiles.
141
What is a Planned Amortization Class (PAC)?
A CMO tranche that provides investors with the most predictable payments
142
What type of risk does a PAC tranche minimize?
Prepayment risk
143
Who is a PAC tranche suitable for?
Investors seeking monthly income payments with a predictable payment structure and maturity
144
What is a Support/ Companion Tranche?
A CMO tranche with the most prepayment risk, variability in payments, and unpredictable maturity.
145
Who is suitable for investing in a Support/ Companion Tranche?
Investors willing to take on a high degree of prepayment risk due to changing interest rates in exchange for a higher yield.
146
Fill in the blank: A Support/ Companion Tranche is suitable for investors willing to take on a high degree of _______ risk.
prepayment
147
True or False: A Support/ Companion Tranche is characterized by predictable maturity.
False
