Investment Products & Securities Types Flashcards

What is the key difference between a stock split and a stock dividend?

Answer: A stock split reduces share price proportionally while a stock dividend issues additional shares from retained earnings

A stock split reduces the share price and increases the share count proportionally (e.g., 2-for-1 doubles shares and halves price), while a stock dividend issues additional shares paid from retained earnings.

Which mutual fund share class typically has no front-end sales load but charges a contingent deferred sales charge (CDSC) if sold within a certain period?

Answer: Class B shares

Class B shares have no front-end load but impose a CDSC that declines over time (e.g., 5% if sold in year 1, decreasing to 0% after several years), plus higher annual 12b-1 fees.

What is a collateralized mortgage obligation (CMO) and what risk is it particularly known for?

Answer: A structured security backed by mortgages; prepayment risk

A CMO is a complex structured product backed by pools of mortgages, and its primary unique risk is prepayment risk — when homeowners refinance or pay off mortgages early, investors receive principal back sooner than expected.

A 'closed-end fund' differs from an 'open-end mutual fund' primarily because:

Answer: Closed-end funds issue a fixed number of shares traded on exchanges, which can trade at premiums or discounts to NAV

Closed-end funds issue a fixed number of shares through an IPO, and those shares trade on exchanges at prices determined by supply and demand, which can be above (premium) or below (discount) the fund's net asset value.

What is a 'Treasury Inflation-Protected Security' (TIPS) and how does it protect investors?

Answer: A Treasury bond whose principal adjusts with the CPI, protecting purchasing power

TIPS are US Treasury securities whose principal value adjusts based on changes in the Consumer Price Index (CPI), so both the principal and resulting interest payments rise with inflation.

Which of the following best describes a 'naked call' option position and its risk?

Answer: Selling a call option without owning the underlying shares; theoretically unlimited loss

A naked call involves selling a call option without holding the underlying shares, exposing the writer to theoretically unlimited losses if the stock price rises dramatically above the strike price.