Chapter 2 - Types, Uses and Tax of Investment Vehicles

Question 1

Common Stock

Answer 1

Shares representing ownership in a corporation, typically entitling the holder to vote and receive dividends.

Question 2

Capitalization

Answer 2

The total value of a company’s outstanding shares, indicating the overall market value of the company.

Question 3

Preferred Stock

Answer 3

Shares that have priority over common stock in terms of dividend payments and assets upon liquidation but usually do not have voting rights.

Question 4

American Depositary Receipts (ADRs)

Answer 4

Securities that represent shares in a foreign company but are traded on U.S. financial markets.

Question 5

Exchange Traded Funds (ETFs)

Answer 5

Investment funds that are traded on stock exchanges much like stocks, and track the performance of an index or a basket of assets.

Question 6

Unit Investment Trusts (UITs)

Answer 6

Investment companies that offer a fixed (unmanaged) portfolio of stocks and bonds for a certain period.

Question 7

Mutual Funds

Answer 7

Investment programs funded by shareholders that trade in diversified holdings and are professionally managed.

Question 8

Hedge Funds

Answer 8

Private investment funds that employ a variety of strategies to achieve high returns, typically for wealthier investors.

Question 9

Real Estate Investment Trusts (REITs)

Answer 9

Companies that own, operate, or finance income-producing real estate.

Question 10

Guaranteed Investment Contracts (GICs)

Answer 10

Insurance contracts that guarantee return of principal plus a fixed or floating interest rate over a specified period.

Question 11

Limited Partnerships

Answer 11

Investment vehicles that limit the liability of most of their owners to the amount of their investment.

Question 12

Equity REITs

Answer 12

REITs that own and operate income-producing real estate.

Question 13

Mortgage REITs

Answer 13

REITs that provide financing for real estate by purchasing or originating mortgages and mortgage-backed securities.

Question 14

Direct Participation Programs (DPPs)

Answer 14

Programs that offer investors direct access to the cash flow and tax benefits of the underlying investments.

Question 15

Net Asset Value (NAV)

Answer 15

The value per share of a mutual fund, calculated by dividing the total value of all the portfolio’s assets minus liabilities by the number of shares outstanding.

Question 16

Variable Annuities

Answer 16

Insurance contracts that provide a variable payout based on the performance of the investment options chosen.

Question 17

Indexed Annuities

Answer 17

Annuities that tie their performance to a specified index, providing a potential hedge against inflation.

Question 18

Futures Contract

Answer 18

A legal agreement to buy or sell a particular commodity, asset, or security at a predetermined price at a specified time in the future.

Question 19

Options Contract

Answer 19

Contracts that give the buyer the right, but not the obligation, to buy or sell an underlying asset at a set price within a specific period.

Question 20

Bonds

Answer 20

Fixed income investments where an investor loans money to an entity that borrows the funds for a defined period at a fixed interest rate.

Question 21

Certificates of Deposit (CDs)

Answer 21

Savings certificates with a fixed maturity date and specified fixed interest rate that are issued by commercial banks.

Question 22

Derivatives

Answer 22

Financial securities whose value is dependent upon or derived from, one or more underlying assets.

Question 23

Asset Allocation

Answer 23

An investment strategy that aims to balance risk and reward by apportioning a portfolio’s assets according to an individual’s goals, risk tolerance, and investment horizon.

Question 24

Financial Risk Management

Answer 24

The practice of creating economic value in a firm by using financial instruments to manage exposure to risk, particularly credit risk and market risk.

Question 25

Portfolio Management

Answer 25

The art and science of making decisions about investment mix and policy, matching investments to objectives, asset allocation for individuals and institutions, and balancing risk against performance.

Question 26

Investment Banking

Answer 26

A segment of banking that helps individuals or institutions raise capital and provide financial consultancy services to them.

Question 27

Corporate Finance

Answer 27

The area of finance dealing with the sources of funding and the capital structure of corporations, the actions that managers take to increase the value of the firm to the shareholders, and the tools and analysis used to allocate financial resources.

Question 28

Public Securities

Answer 28

Securities such as stocks or bonds that are listed on a public exchange and available for investors to buy and sell.

Question 29

Private Securities

Answer 29

Securities that are not listed on a public exchange and are sold directly to investors through private offerings.

Question 30

Risk Capital

Answer 30

The money allocated for high-risk high-return investments.

Question 31

Venture Capital

Answer 31

Financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential.

Question 32

Taxable Equivalent Yield

Answer 32

A calculation that shows the return on taxable investments that would be equivalent to the return on a tax-exempt investment.

Question 33

Capital Gains

Answer 33

Profits from the sale of property or an investment.

Question 34

Dividends

Answer 34

Payments made by a corporation to its shareholder members, usually derived from the company’s profits.