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S66 deck > Suitability > Flashcards

Suitability Flashcards

1
Q

Common Stock

A

− Corporate ownership
− May pay dividends

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2
Q

Large Cap common stock

A

least volatility/least growth potential

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3
Q

Mid Cap common stock

A

more volatility/more growth potential

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4
Q

Small Cap common stock

A

most volatility/most growth potential

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5
Q

Common stock is suitable for

A

investors seeking long-term growth (capital appreciation) and the opportunity to outpace inflation

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6
Q

Preferred Stock

A

− Pays fixed dividend, but doesn’t share in earnings growth
− Receives dividends before common
− Has no voting or preemptive rights
− Subject to inflation (purchasing power) risk and interest-rate risk

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7
Q

Preferred Stock is suitable for

A

investors seeking stable dividend income with returns that are comparable to long-term bonds

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8
Q

Growth Stock

A

− More volatile (risky) than most stocks; has a high beta
− Offers little or no dividend income
− Low dividend payout ratio and high P/E ratio

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9
Q

Growth Stock is suitable for

A

investors seeking long-term growth and retirement savings; good hedge against inflation

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10
Q

Value Stock

A

− Company has stable earnings and the stock is less risky than most stocks (has a low beta)
− High dividend payout and low P/E ratio

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11
Q

Value Stock is suitable for

A

investors seeking stable dividend income (e.g., older or retired investors)

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12
Q

Bond

A

− Provides stable (fixed) interest income
− Conservative, less risky than equities
− Subject to inflation (purchasing power) risk, interest-rate (market) risk, default (credit) risk, reinvestment risk
− Longer maturities have more risk

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13
Q

Bonds are suitable for

A

older and/or more conservative investors who want consistent income

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14
Q

Corporate Bond

A

− May be secured or unsecured
− Price fluctuation is influenced by length of maturity and interest rate/coupon
− Interest rate is generally fixed and the interest is fully taxable

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15
Q

Corporate Bonds are suitable for

A

investors seeking current income for a specific period

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16
Q

Convertible Bond

A

− Convertible into a fixed number of common shares
− Offers lower interest rate than non-convertibles
− For parity purposes, its price is influenced by the value of the underlying stock

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17
Q

Convertible Bonds are suitable for

A

investors seeking income with the potential for long-term growth (the relative
safety of a bond, with the growth potential of the underlying stock)

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18
Q

Zero-Coupon Bond

A

− Issued at a deep discount, but matures at par value
− Makes no interest payments
− Bond’s basis is accreted and treated as interest income
− Discount is taxed annually for corporates, and tax-exempt for municipal (OID) bonds
− Has a high degree of interest-rate and inflation risk, but no reinvestment risk

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19
Q

Zero-Coupon Bonds are suitable for

A

investors seeking an investment that’s less risky than equities and provides
predictable growth (used for retirement planning or college funding)

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20
Q

High-Yield Bond (Junk Bond)

A

− High risk bond with a speculative rating
− Offers a higher coupon
− Includes Income (Adjustment) Bond

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21
Q

High-Yield Bonds (Junk Bonds) are suitable for

A

high-risk, speculative investors

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22
Q

Money Market Instruments

A

− Short-term debt (one year or less to maturity) with very low yields
− Very safe and liquid investments
− Examples include:
commercial paper (CP)
bankers’ acceptance (BA)
short-term negotiable CDs
repurchase agreements (REPOs)

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23
Q

Money Market Instruments are suitable for

A

investors seeking conservative investments for short-term needs; used to hold funds safely until needed or invested for a longer term

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24
Q

Municipal Bond

A

− Pays federally tax-exempt interest
− Price fluctuation is influenced by length of maturity and interest rate
− G.O. bonds typically have less credit risk than revenue bonds
− Due to tax exemption, pays lower coupon than a comparable corporate bond

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25
Municipal Bonds are suitable for
investors in high tax brackets and seeking tax-exempt interest income
26
Municipal Note
− Safe and liquid short-term municipal debt (typically a money market instrument) − Pays federally tax-exempt interest − Offers a low yield − Examples include: RAN, TAN, BAN, GAN
27
Municipal Notes are suitable for
investors in high tax brackets who are investing for short-term needs
28
Treasury Note & Treasury Bond
− Low risk of default; low interest payments − Subject to inflation and interest-rate risk − Note maturities are from 2-10 years − Bond maturities exceed 10 years − Interest income is exempt from state and local tax (subject to federal)
29
Treasury Note & Treasury Bonds are suitable for
investors seeking fixed income and safety of principal
30
Treasury Bill
− Short-term and liquid (a money-market instrument) − Safe investment with low yield − Maturities of up to one year
31
Treasury Bills are suitable for
investors seeking absolute safety of principal who are willing to accept a very low return
32
Treasury Inflation Protected Security (TIPS)
− A conservative long-term income investment which provides protection from inflation (purchasing power) risk − Pays a low rate of interest at a fixed rate, but is based on a principal amount that’s adjusted for inflation (the income is therefore variable)
33
Treasury Inflation Protected Security (TIPS) are suitable for
investors seeking a hedge against inflation
34
Government Agency Mortgage Backed Securities
− Pass through debt certificates that make monthly payments of both principal and interest (fully taxable) which are derived from residential mortgage payments − Issued by federal agencies or governmentsponsored enterprises; considered AAA rated − Due to prepayment risk (mortgages being paid off early), the maturity is uncertain
35
Government Agency Mortgage Backed Securities are suitable for
investors seeking safety, monthly interest income, and a yield that’s slightly higher than U.S. Treasuries
36
Direct Participation Program (DPP) Limited Partnership
− Distributes passive income and passive losses to its partners − May provide tax deductions and tax credits − Offers limited liability to limited partners − Illiquid and subject to the adverse effects of tax law changes − Risk of IRS recapturing tax benefits
37
Direct Participation Program (DPP) Limited Partnerships are suitable for
investors who are able to afford significant risks and commit capital for the long term
38
Mutual Fund
− Offers shares of a portfolio that’s diversified based on the type of fund − Less risky and easier than buying individual securities − Priced once per day (forward pricing) − Fund will redeem shares at NAV; there’s no secondary market − Suitability varies based on objectives and share class
39
Mutual Funds are suitable for
investors seeking to invest in a diversified portfolio of securities rather than creating their own
40
Growth Fund
− A managed portfolio consisting of common stocks which have strong upside potential − May pay little or no dividends − Risk is determined by types of companies included (large-, mid-, small-cap)
41
Growth Funds are suitable for
investors willing to accept the risk associated with long-term growth
42
Income Fund
− A managed portfolio that primarily consists of bonds, preferred stocks, and possibly high dividend paying common stocks − Price is less volatile than growth funds − Offers a high dividend yield
43
Income Funds are suitable for
investors seeking current income
44
Specialized/Sector Fund
− A managed portfolio that invests in one specific industry or geographic area − The least diversified type of fund − Higher risk with higher potential returns
45
Specialized/Sector Funds are suitable only for
aggressive investors who are seeking a higher return
46
Index Fund
− A passively managed fund that buys and holds securities that mirror a specific index (e.g., the S&P 500) − Low expense ratio
47
Index Funds are suitable for
investors seeking a low-cost alternative to more actively managed funds with similar objectives
48
Target Fund
− A portfolio of securities which will shift over time − Fund starts with riskier investments and then transitions into more conservative investments as the target date approaches
49
Target Funds are suitable for
investors who have a general idea of a future financial goal (planned retirement or when children will attend college)
50
Exchange Traded Fund (ETF)
− Offers shares that track an index and trade in the secondary market like common stock − Unlike mutual funds, shares are priced and traded in real-time on an exchange − May be sold short and purchased on margin − Variations include high risk leveraged and inverse ETFs
51
Exchange Traded Funds (ETFs) are suitable based on the type of ETF investment made
* Traditional ETFs are suitable as a low cost and long-term investment (like mutual funds) * Non-traditional ETFs (i.e., leveraged and inverse) are suitable for short-term trading and speculation
52
Exchange Traded Note (ETN)
− Similar to an ETF; however, it’s considered unsecured debt; subject to default risk − Often tracks the performance of an exotic mix of assets (e.g., foreign stocks and illiquid markets) − May be sold short and purchased on margin
53
Exchange Traded Notes (ETNs) are suitable for
investors seeking to add diversification in their portfolio and those who want a speculative investment
54
Closed-End Fund
− Issues a limited number of shares which are priced and traded in real-time (not redeemable) − Share price is not based on NAV; instead, it’s set in market by supply and demand
55
Closed-End Funds are suitable for
investors seeking to invest in a diversified portfolio with short-term trading capabilities; similar to ETFs
56
Real Estate Investment Trust (REIT)
− A portfolio consisting of income producing properties and/or mortgages − Distributes 90% of its net income to investors, but doesn’t distribute losses − Dividends are taxed as ordinary income (non-qualified) − Not considered an investment company
57
Real Estate Investment Trusts (REITs) are suitable for
investors seeking high dividend yield and willing to accept the price volatility associated with the value of the underlying properties
58
Hedge Fund
− A private investment fund that’s not subject to the Investment Company Act of 1940 (i.e., NOT an investment company) − May use exotic strategies that involve short selling, leverage, and derivatives − Doesn’t publish its daily NAV; illiquid
59
Hedge Funds are suitable only for
sophisticated investors who can afford the increased risk and potential loss of capital; must be able to tie up funds for the long-term
60
Variable Annuity
− An investment contract with an insurance company; risk assumed by annuitant − Can be set up to provide periodic payments for life − Income grows tax-deferred until paid out − Risk and return are based on the investments chosen in the separate account (investments may be adjusted to suit the investor’s age and risk profile)
61
Variable Annuities are suitable for
investors seeking tax-deferred retirement savings or the potential for lifetime payments
62
Fixed Annuity
− An investment contract with an insurance company, risk assumed by ins. company − May provide fixed payments for life − Income grows tax-deferred until paid out − The investment return is at a fixed rate
63
Fixed Annuities are suitable for
investors seeking lifetime income payments after retirement, with the understanding that the fixed rate of return may not keep up with inflation
64
Individual Retirement Account (IRA)
− A tax deferred investment account; may be funded by persons with earned income − Withdrawals are taxed as ordinary income − Penalty is assessed for early withdrawal − RMD applies
65
Individual Retirement Accounts (IRAs) are suitable for
persons with earned income who are saving for retirement
66
Roth IRA
− A tax-free investment account available to persons with earned income − Income limits are imposed on contributors (not available for high income persons) − Qualified withdrawals are tax-free − Penalty is assessed for early withdrawal − RMD doesn’t apply
67
Roth IRAs are suitable for
persons with earned income (below the limit) who are saving for retirement and want future tax-free withdrawals
68
Coverdell Education Saving Account (CESA)
− A tax-free investment account established to help pay a child’s education expenses − Income limits are imposed on contributors − Withdrawals are tax-free if used for qualified education expenses (at any level of education) − Penalties and taxes are assessed if the funds are not used for education − Change of beneficiary is allowed
69
Coverdells are suitable for
investors saving for a child’s education expenses, including elementary, secondary, or higher education
70
529 College Savings Plan
− A tax-free investment account established to help pay higher education expenses and private school (K through 12) tuition ($10,000 per year) − No income limits are imposed on contributors − Withdrawals are tax-free if the funds are used for qualified education expenses − Penalties and taxes are assessed if the funds are not used for education − Change of beneficiary is allowed
71
529 College Savings Plans are suitable for
investors saving for a child’s higher education expenses (college funding) or for paying for private school tuition and books for grades K through 12 (up to $10,000 per year)
72
# Suitable Investments Long-Term Growth | Longer time horizon; greater volatility
* Common stock * Growth stock * Growth fund * Stock fund * Index fund * Stock ETF
73
# Suitable Investments Growth and Income | Less volatility; reduced earnings
* Mix of stocks and bonds * Convertible bond * REIT
74
# Suitable Investments Income | Least volatility
* Income fund * Bonds and bond funds * Preferred stock * Utility stock
75
# Suitable Investments Safety | Low Credit Risk
* U.S. Treasury * Agency debt * Investment-grade corporate & municipal debt
76
# Suitable Investments Short-Term Capital Preservation | Money-Market Instruments
* T-bill * Commercial paper * Money-market mutual funds (these funds are not money market instruments, but they allow investors to own an interest in a portfolio of money market instruments)
77
# Suitable Investments Tax-Advantaged Investments | High Tax Bracket
* Tax-exempt income − Municipal bond * Tax-deferral − Annuities − IRA and retirement plans − Education savings plans * Tax credits/deductions − DPPs/limited partnerships
78
# Suitable Investments Aggressive Growth or Income | High risk, high reward
* High-yield bond * Sector fund * Small/micro-cap stocks and funds
79
# Suitable Investments Speculation | Active, short-term speculation
* Option strategies * Leveraged ETF * Short stock positions

S66 deck (10 decks)

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