Questions on Asset Classes and Financial Instruments
Chapter 2 – Asset Classes and Financial Instruments
Basic
1. What are the key differences between common stock, preferred stock, and corporate bonds?
The key differences are that common stock has voting power, residual claim, and limited liability. Preferred stock on the other hand, behaves like a hybrid stock because it has preferred and common dividends, but also it behaves like the corporate bonds because it has fixed income and is non-voting characteristics. Finally, corporate bonds are instruments of debt that provide fixed income and have non-voting characteristics. 2. Why do most professionals consider the Wilshire 5000 a better index of the performance of the broad stock market than the Dow Jones Industrial Average?
Most professionals consider the Wilshire 5000 a better index, because it is computed using the market value of essentially all actively traded stocks (approximately 6000 stocks) in the U.S.
3. What features of money market securities distinguish them from other fixed-income securities?
Money market securities are short-term, highly liquid, and relative low-risk debt instruments.
4. What are the major components of the money market?
T-Bills, Certificates of Deposit, Commercial Paper, Banker’s acceptance, Eurodollars, Repos and Reverses, Federal Funds, and Brokers’ calls.
5. Describe alternative ways that an investor may add positions in international equity to his or her portfolio. American Depository Receipts or Shares (ADR or ADS) - certificates are traded in U.S. markets that represent ownership in shares of a foreign company. Each ADR may correspond to ownership of a fraction of a foreign share(s) of a foreign corporation. Mutual funds that invest in international companies.
6. Why are high-tax-bracket investors more inclined to invest in municipal bonds than are low-bracket investors?
Because the tax-exempt feature of the municipal bonds is more valuable for high-tax-bracket investors because they can make more
Basic
1. What are the key differences between common stock, preferred stock, and corporate bonds?
The key differences are that common stock has voting power, residual claim, and limited liability. Preferred stock on the other hand, behaves like a hybrid stock because it has preferred and common dividends, but also it behaves like the corporate bonds because it has fixed income and is non-voting characteristics. Finally, corporate bonds are instruments of debt that provide fixed income and have non-voting characteristics. 2. Why do most professionals consider the Wilshire 5000 a better index of the performance of the broad stock market than the Dow Jones Industrial Average?
Most professionals consider the Wilshire 5000 a better index, because it is computed using the market value of essentially all actively traded stocks (approximately 6000 stocks) in the U.S.
3. What features of money market securities distinguish them from other fixed-income securities?
Money market securities are short-term, highly liquid, and relative low-risk debt instruments.
4. What are the major components of the money market?
T-Bills, Certificates of Deposit, Commercial Paper, Banker’s acceptance, Eurodollars, Repos and Reverses, Federal Funds, and Brokers’ calls.
5. Describe alternative ways that an investor may add positions in international equity to his or her portfolio. American Depository Receipts or Shares (ADR or ADS) - certificates are traded in U.S. markets that represent ownership in shares of a foreign company. Each ADR may correspond to ownership of a fraction of a foreign share(s) of a foreign corporation. Mutual funds that invest in international companies.
6. Why are high-tax-bracket investors more inclined to invest in municipal bonds than are low-bracket investors?
Because the tax-exempt feature of the municipal bonds is more valuable for high-tax-bracket investors because they can make more