Investment Products & Financial Instruments Flashcards

A callable bond gives the issuer the right to redeem the bond before maturity. How does this feature typically affect the bond's yield compared to a non-callable bond with identical characteristics?

Answer: Callable bonds offer higher yields to compensate investors for call risk

Callable bonds offer higher yields than comparable non-callable bonds because investors demand compensation for the risk that the bond may be redeemed early, typically when interest rates fall.

Which of the following best describes a Real Estate Investment Trust (REIT)?

Answer: A company that owns, operates, or finances income-producing real estate and distributes at least 90% of taxable income as dividends

REITs are companies that own income-producing real estate and must distribute at least 90% of taxable income to shareholders as dividends to maintain their tax-advantaged status.

An investor purchases a Treasury Inflation-Protected Security (TIPS). As inflation rises, what happens to the principal value of the TIPS?

Answer: The principal adjusts upward with inflation, increasing interest payments

TIPS principal adjusts upward with inflation (as measured by CPI), which in turn increases the dollar amount of each fixed coupon payment, protecting investors from inflation erosion.

A structured note that offers 80% participation in S&P 500 gains with full principal protection at maturity is best described as which type of instrument?

Answer: A principal-protected note (PPN)

A principal-protected note (PPN) guarantees return of principal at maturity while providing partial upside participation in an underlying index, achieved by combining a zero-coupon bond with options.

Which statement about exchange-traded funds (ETFs) versus mutual funds is CORRECT?

Answer: ETFs trade on exchanges throughout the day and may trade at a premium or discount to NAV

Unlike mutual funds that price once daily at NAV, ETFs trade continuously on exchanges and can trade at prices above (premium) or below (discount) their underlying net asset value.

A put option with a strike price of $50 on a stock currently trading at $45 is said to be:

Answer: In-the-money

A put option is in-the-money when the stock price is below the strike price; here $45 < $50 means the put has $5 of intrinsic value.

Which of the following is a key characteristic of a zero-coupon bond?

Answer: It is issued at a deep discount and pays full face value at maturity with no periodic interest

Zero-coupon bonds are issued at a significant discount to face value and pay no periodic interest; the investor's return comes entirely from the appreciation to face value at maturity.