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Know your BRTI (Benefits, Risk, Typical Investor) > Benefits, Risk, and the Typical Investor (Debt) > Flashcards

Benefits, Risk, and the Typical Investor (Debt) Flashcards

1
Q

Benefits of bonds in general

A

a. Fixed income
b. Lower volatility than equities
c. Some bonds offer tax advantages

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2
Q

Risk of bonds in general

A

a. Default risk
b. Interest rate (market)
c. Reinvestment risk
d. Call risk (if applicable)
e. Inflation risk

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3
Q

The typical investor for bonds

A

a. Fixed income objective
b. Sophisticated
c. Near to, or already in retirement
d. Anyone that is risk averse (even if younger)

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4
Q

Benefits of corporate bonds

A

a. Fixed income (higher yields than municipal and US government bonds)
b. May be convertible
c. Senior to equity securities in a liquidation (i.e., “senior security”)

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5
Q

Risk of corporate bonds

A

a. Default risk
b. Interest rate risk
c. Reinvestment risk
d. Call risk (if applicable)
e. Inflation risk

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6
Q

The typical investor for corporate bonds

A

a. Fixed income objective
b. Willing to take on greater risk for higher yields

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7
Q

Benefits of zero coupon bonds

A

a. Low initial investment
b. No reinvestment risk

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8
Q

Risk of zero coupon bonds

A

a. Most volatile bond
b. Taxed annually on interest income not yet received (phantom income)
c. Default risk
d. Interest rate (market) risk
e. Inflation risk

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9
Q

The typical investor for zero coupon bonds

A

a. No need for current income but desire a known amount at a future date for a goal/life event
b. Willing to accept volatility
c. Pension plans or individuals in retirement accounts (to defer tax on phantom income)

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10
Q

Benefits of U.S. Government Bonds

A

a. Fixed income
b. Safety of principal (direct backing by the US Government)
c. Liquidity

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11
Q

Risk of U.S. Government Bonds

A

a. Interest rate (market) risk
b. Reinvestment risk
c. Inflation risk

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12
Q

The typical investor of U.S. Government bonds

A

a. Fixed income objective (willing to accept lower yields in exchange for greater safety)
b. Preservation of capital (if held to maturity) objective

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13
Q

Benefits of Agency Bonds

A

a. Fixed income (monthly if from MBS)
b. Safety of principal (implicit backing by the US Government)
c. Liquidity

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14
Q

Risk of agency bonds

A

a. Interest rate (market) risk
b. Prepayment (reinvestment) and extension risk (for MBS only)
c. Bad mortgages can affect payment (for MBS only)

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15
Q

Typical investor agency bonds

A

Typical investor
a. Fixed income objective
b. Willing to take on slightly greater risk for higher yields (than US Government bonds)

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16
Q

Benefits of CMOs

A

a. Monthly income
b. More predictable maturities (than agency pass-through MBS)
c. Wide range of available maturities and yields (compared to agency pass-through MBS)

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17
Q

Risk of CMOs

A

a. Default risk
b. Prepayment (reinvestment) and extension risk
c. Complex structure

18
Q

Typical investor for CMOs

A

a. Monthly income objective
b. Willing to take on slightly greater risk for higher yields (than agency MBS)

19
Q

Benefits of Money Markets

A

a. Safety/preservation of capital
b. Liquidity

20
Q

Risk of Money Markets

A

a. Interest rate risk
b. Reinvestment risk

21
Q

Typical Investor for Money Markets

A

a. Very risk averse (safe harbor to preserve capital)
b. Institutional investor
c. Time horizons of one year or less

22
Q

Benefits of Municipal Bonds

A

a. Federally tax-exempt income (potentially triple tax exempt)
1) Beneficial for investors in higher tax brackets
b. Safety of principal (more so for GO bonds)

23
Q

Risk of Municipal Bonds

A

a. Lower yields (due to tax benefits)
b. Interest rate risk
c. Reinvestment risk
d. Limited liquidity (generally to intrastate investors)

24
Q

Typical investor for Municipal Bonds

A

a. Fixed income objective
b. Willing to accept lower yields in return for safety of principal and tax advantages
c. High tax bracket
d. Investors of all timeframes

25
Q

Benefits of Options

A
  1. Lower capital requirement
  2. Used for various objectives
  3. Variety of underlying investments
  4. Liquidity
26
Q

Risk of Options

A
  1. Some strategies have unlimited risk
  2. Strategies can be complex
  3. Carry many of the same risks as underlying investments
  4. Implementation of strategies for the long term requires continuous capital (options expire)
27
Q

Typical investor of Options

A
  1. Wide variety of objectives
  2. Willing to employ complex and potentially risky strategies to meet objective
  3. Sophisticated
28
Q

Benefits of Mutual Funds

A

a. Fund objectives can cover all investment goals
b. Professional management/selection
c. Diversification/reduced capital risk
d. Lower cost
e. Liquidity

29
Q

Risk of Mutual Funds

A

a. Market risk
b. Associated fees
c. Pricing is not continuous intraday

30
Q

Typical investor Mutual Funds

A

a. Funds available to meet all investment objectives
b. Seeks diversification with low cost and professional management
c. Generally less sophisticated investor who is more risk averse

31
Q

Benefits of ETFs

A

a. Available for all market indices
b. Diversification
c. Cost efficient (lower expense ratios than index mutual funds)
d. Tax efficient
e. Intraday pricing
f. Some leveraged and inverse options

32
Q

Risk of ETFs

A

a. Market risk
b. Less popular ones can be less liquid
c. Commissions can reduce return (if actively traded)
d. Tracking error

33
Q

Typical investor ETFs

A

a. Seek market returns
b. More sophisticated and active trader

34
Q

Benefits of Variable Annuities

A

a. Potential for lifetime income (if you annuitize or purchase a lifetime income rider)
b. Tax-deferred growth
c. No limits on contributions
d. Death benefit
e. Professional management of Separate Account

35
Q

Risk of variable annuities

A

a. Income is variable
b. Not suitable for short term investment
c. Associated fees (potentially high front-end loads, possible surrender charges)

36
Q

Typical investor Variable annuities

A

a. Seeking supplemental retirement savings
b. Wealthy
c. Longer time horizons

37
Q

Benefits of REITS

A
  1. Reliable dividend income
  2. Low volatility
  3. Lower liquidity risk (than some types of real estate investments)
  4. Hedge to equity market
38
Q

Risk of REITS

A
  1. Problem loans can affect cash flows and capital gains
39
Q

Typical investor REITS

A
  1. Seeking dividend income
  2. Looking for real estate investment without large cost or illiquidity
40
Q

Benefits of a Partnership

A
  1. Variety of objectives (many are aggressive)
  2. Tax advantaged
  3. Professional management
41
Q

Risk of a Partnership

A
  1. Illiquid
  2. Complicated tax implications
  3. May be speculative or subject to recourse
  4. Legislative risk
42
Q

Typical investor of Partnerships

A
  1. Looking for tax advantaged investment
  2. Sophisticated and typically aggressive
  3. Intermediate to longer time horizons

Know your BRTI (Benefits, Risk, Typical Investor) (2 decks)

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