Financial Products - About Flashcards
What are the four key characteristics that distinguish common stock from other securities?
1) Voting rights 2) Potential dividend payments 3) Residual claim on assets 4) No maturity date
How does preferred stock’s dividend payment differ from common stock?
Preferred stock pays a fixed dividend amount that must be paid before common stock dividends, and may be cumulative (unpaid dividends accumulate)
Compare and contrast ADRs with direct foreign stock ownership:
ADRs trade in USD, settle through U.S. clearing systems, and have standardized ratios to underlying shares. They eliminate currency conversion and international settlement issues.
What happens to stock rights if not exercised before expiration?
Rights expire worthless. The investor loses the opportunity to purchase shares at the discount price and any premium paid for the rights.
List three key differences between warrants and stock options:
1) Warrants are issued by companies vs options by exchanges 2) Warrants have longer terms (often years) 3) Exercise of warrants creates new shares while options don’t
In corporate bonds, what determines credit spread and why is it important?
Credit spread is determined by: 1) Credit rating 2) Time to maturity 3) Market conditions 4) Industry factors. It represents the additional yield over Treasury bonds to compensate for risk.
Why do Treasury Bills trade at a discount rather than pay periodic interest?
T-Bills are zero-coupon instruments that mature at par value. The difference between purchase price and par represents the interest earned, simplifying administration and tax treatment.
What factors affect Treasury Note prices in the secondary market?
1) Changes in interest rates 2) Time remaining to maturity 3) Supply and demand 4) Federal Reserve policy 5) Economic conditions
How do Treasury Bonds differ from Treasury Notes in terms of interest rate risk?
Treasury Bonds have greater interest rate risk due to longer maturities (>10 years). A 1% rate change has a larger impact on a 30-year bond than a 10-year note.
What makes municipal bonds attractive to high-income investors?
Interest is generally exempt from federal taxes and may be exempt from state/local taxes if issued in the investor’s state of residence.
Explain how zero-coupon bonds’ tax treatment differs from traditional bonds:
Zero-coupon bondholders must pay taxes on accreted interest annually even though no payments are received until maturity (phantom income)
What three main risks do TIPS protect against and how?
1) Inflation risk - principal adjusts with CPI 2) Interest rate risk - coupon rate applies to adjusted principal 3) Credit risk - backed by U.S. government
Compare agency bonds vs. Treasury bonds in terms of:
Agency bonds typically offer: 1) Slightly higher yields 2) Lower liquidity 3) Implied vs. direct government backing 4) More complex structures
Name four key factors that determine mutual fund NAV calculations:
1) Market value of portfolio securities 2) Accrued income 3) Liabilities (fees, expenses) 4) Number of outstanding shares
What are the primary advantages and disadvantages of ETFs vs mutual funds?
Advantages: 1) Intraday trading 2) Generally lower fees 3) Tax efficiency | Disadvantages: 1) Trading costs 2) Potential premium/discount to NAV 3) Lower dividend yields
How do Unit Investment Trusts (UITs) differ from mutual funds in terms of portfolio management?
UITs have fixed portfolios that generally don’t trade after initial creation, while mutual funds actively manage holdings. UITs also have set termination dates.
What factors determine closed-end fund market price vs NAV?
1) Supply/demand for shares 2) Market sentiment 3) Interest rates 4) Fund performance 5) Distribution policy
Why are money market funds considered lower risk than other mutual funds?
They invest in short-term, high-quality debt instruments, maintain $1 NAV, have strict maturity and diversity requirements, and are subject to SEC Rule 2a-7
What distinguishes an index fund from an actively managed fund?
Index funds: 1) Track specific indices 2) Have lower turnover 3) Lower expenses 4) More tax efficient 5) More transparent holdings
How does call option delta change as the option moves in-the-money?
Delta increases (approaches 1.0) as the option moves deeper in-the-money, reflecting higher probability of exercise and greater correlation with underlying stock price
What are the key risks of writing naked put options?
1) Unlimited downside risk 2) Margin requirements 3) Assignment risk 4) Time decay benefit can be overwhelmed by large price moves
Why do futures contracts have standardized terms?
Standardization enables: 1) Exchange trading 2) Price transparency 3) Liquidity 4) Efficient clearing and settlement 5) Risk transfer
Compare forward contracts vs futures contracts:
Forwards are: 1) Customized 2) OTC traded 3) Higher counterparty risk 4) Less liquid | Futures are: 1) Standardized 2) Exchange traded 3) Cleared 4) More liquid
What are the two main types of REITs and how do they differ?
Equity REITs own/operate properties and derive income from rents. Mortgage REITs invest in mortgages/MBS and derive income from interest payments.
