BRIT Suitability Flashcards
Benfits of Common Sotkc
- capital appreciation
- potential income from dividends
- liquidity
- hedge against inflation
Risks of Common Stock
- market (systematic)
- business, principal, financial (non-systematic)
- price volatility
- dividends not guranteed
Typical investor of common stock
- growth objective
- income expectation from blue chip companies
- willing to accept some risk for potential of higher returns
- longer time horizon
Benefits of Preferred stock
- fixed income from dividends
- may qualify for preferential tax treatement
- less volatile than common
- may be convertible, cumulative, participating
- prior claim in liquidation to common
Risks of Preferred stock
- market risk
- inflation risk
- dividends not guaranteed
- may be callable
- lower priority in liquidation than bonds
Typical investor of Preferred stock
- fixed income objective
- more conservative ( risk averse) than common stock
- institutional or more sophisticated
Benefits of Bonds
- fixed income
- lower volatility than equities
- some bonds offer tax advantages
Risks of Bonds
- default risk
- interest rate risk
- reinvestment risk
- call risk
- inflation risk
Typical Investor of Bonds
- fixed income objective
- sophisticated
- near to or in retirement
- anyone that is risk averse ( even if younger)
Benefits of corporate bonds
- fixed income ( higher yields than municipal and us government bonds)
- may be convertible
- senior to equity securities in a liquidation
Risks of corporate bonds
- default risk
- interest rate risk
- reinvestment risk
- call risk
- inflation risk
Typical investor of corporate bonds
- fixed income objective
- willing to take on greater risk for higher yields
Benefits of Zero-coupon bonds
- low initial investment
- no reinvest risk
Risks of zero-coupon bonds
- most volatile bond
- taxed annually on interest income not yet received
- default risk
- interest/market risk
- inflation risk
Typical investor of zero-coupon bonds
- no need for current income, but desire a known amount as future date for a goal
- willing to accept volatility
- pension plans or individuals in retirement accounts
Benefits of US Government Bonds
- fixed income
- safety of principal
- liquidity
risks of us government bonds
- interest rate risk
- reinvestment risk
- inflation risk
typical investor of us government bonds
- fixed income objective
- preservation of capital
Benefits of Agency Bonds
- fixed income ( monthly)
- safety of principal
- liquidity
Risks of Agency Bonds
- interest rate risk
- prepayment and extension risk
- bad mortgages can affect payment
Typical investor of Agency Bonds
- fixed income objective
- willing to take on slightly greater risk for higher yields
Benefits of CMOs
- monthly income
- more predictable matures that mortgage backed
- wide range of available matures and yields
Risks of CMOs
- Default risk
- prepayment risk
- compelx structure
Typical Investor of CMOs
- monthly income objective
- willing to take on slightly greater risk for higher yields
Benefits of Money Markets
- safety/ preservation of capital
- liquidity
Risks of Money Markets
- interest rate risk
- reinvestment risk
Typical Investor of Money Marks
- very risk averse
- institutional investor
- time horizons of one year or less
Benefits of Municipal Bonds
- federally tax- exempt income
- beneficial for investors in higher tax brackets - safety of principal
Risks of Municipal Bonds
- lower yields
- interest rate risk
- reinvestment risk
- limited liquidity
Typical investor of Municipal Bonds
- fixed income objective
- willing to accept lower yields in return for safety of principal and tax advantages
- High tax bracket
- investors of all time frames
Benefits of Options
- lower capital requirement
- used for various objectives
- variety of underlying investments
- liquidity
Risks of Options
- some strategies have unlimited risk
- strategies can be complex
- carry many of same risks as underlying investments
- implementation of strategies for the long term requires continuous capital
Typical Investor of Options
- wide variety of objectives
- willing to employ complex and potentially risk strategies to meet objective
- sophisticated
Benefit of Mutual funds
- fund objectives can cover all investment goals
- professional management/ selection
- diversification/ reduce capital risk
- lower cost
- liquidity
Risks of Mutual Funds
- market risks
- associated feeds
- pricing is not continuous intraday
Typical Investor of mutual funds
- funds available to meet all investment objectives
- seeks diversification with low cost and professional management
- generally less sophisticated investor who is more risk averse
Benefits of Variable Annuities
- potential for lifetime income
- tax deferred growth
- no limits on contributions
- death benefit
- professional management of Separate Account
Risks of Variable Annuities
Income is variable
- not suitable for short term
- associated feeds ( high front end loads, possible surrender charges)
Typical Investor of variable annuities
- seeking supplemental retirement savings
- wealthy
- longer time horizons
Benefits of ETFS
- Available for all market indices
- diversification
- cost efficient
- tax efficient
- intraday pricing
- some leveraged and inverse options
risks of ETF
- Market risk
- less popular ones can be less liquid
- commissions can reduce return
- tracking error
Typical Investor of ETF
- seeks market returns
- generally more sophisticated and active trader
- all time horizons, except very short term
Benefits of REITs
- reliable dividend income
- 20% deductible
- low volatility
- lower liquidity risks
- hedge to equity market
Risks of REITS
- problem loands can affect cah flows and gains
typical investor or REITS
-seeking dividend income
looking for real estate investment without large cost or illiquidity
- longer time horizon
Risk Tolerant Customer could invest in
- speculative stocks and bonds,
- growth stocks
- more risk CMO tranches ( companion tranches)
Customer who is not risk tolerant could invest in
- U.S Government and Agency Debt
- PAC Tranches
- investment grade bonds and blue chip stocks
A customer has the following investment mix:
25% Growth Stocks 25% Defensive Stocks 25% High Quality Corporate Bonds 25% Speculative Stocks During a period of economic expansion, the best performing asset classes are likely to be:
I Growth Stocks
II Defensive Stocks
III High Quality Corporate Bonds
IV Speculative Stocks
A. I and III
B. I and IV
C. II and III
D. II and IV
The best answer is B.
During a period of economic expansion, growth stocks and speculative stocks perform well compared to the overall market. However, during a period of recession, these tend to decline in value. In contrast, in a period of expansion, defensive stocks (stocks unaffected by an overall market downturn, such as pharmaceuticals and food) and high quality corporate bonds underperform the overall market by not increasing in price as rapidly; but in a period of recession, they outperform the overall market, since they don’t readily lose value.
A client, age 67, owns his own home free and clear. The customer has an annual income of $25,000, mainly from social security and interest on funds held in a bank savings account. The customer has never invested and is told by his nephew that the technology company that he works for is coming out with a hot new product that will really increase the company’s stock price. The BEST recommendation to be made to this client is to:
A. do nothing
B. only invest enough of his savings account in the technology company’s stock so that his reduced income still covers his bills as they come due
C. take out a mortgage on his fully paid house and use the proceeds to make the investment in the technology company and then pay off the mortgage from the profits on the investment
D. liquidate the entire savings account and use the proceeds to make the technology company investment because the customer can still live on this social security
A.
This customer is age 67 and has very little income and no other liquid assets. He cannot afford to lose a bunch of money and he should do nothing!
shorter time horizon means more
cash, liquidity
Which bond recommendation is most suitable for a customer who wishes to avoid credit risk?
A.
Pre-refunded bond
B.
G.O. bond
C.
Revenue bond
D.
AAA corporate bond
The best answer is A.
When a municipality pre-refunds its debt, it backs those bonds with escrowed U.S. Government and Agency securities, making the credit rating AAA. This is the safest bond of the choices offered, since it is backed by collateral.
A General Obligation bond is backed by faith, credit and unlimited taxing power of a municipal issuer, so it is pretty safe as well - but it is not secured. A Revenue bond is backed by a pledge of revenues from an enterprise activity, and these are less safe than G.O. bonds.
AAA rated Corporate bonds are also very safe, but if they are long term bonds, a lot can go wrong for a company over a long term time frame. Again, these are not as safe as a pre-refunded bond.
