Chapter 3 of 420% of exam
Investment Vehicle Characteristics
The features and risks of equity, debt, pooled, derivative, and insurance-based products, and how each fits different client needs and risk profiles.
Equity Securities
Common stock is an ownership interest with voting rights and a residual claim, offering growth potential but the greatest risk in liquidation.
Preferred stock generally pays a fixed dividend and ranks ahead of common in dividends and liquidation, behaving partly like fixed income.
Convertible bonds and preferred can be exchanged for common shares, blending debt or income features with equity upside.
Equity prices reflect company-specific and market-wide factors, driving both unsystematic and systematic risk.
Debt Securities
Bond prices and interest rates move inversely, and longer maturities and durations increase price sensitivity.
U.S. Treasuries have virtually no default risk but remain exposed to interest-rate, reinvestment, and inflation risk.
Municipal bonds typically offer lower nominal yields offset by federal tax-exempt interest, requiring taxable-equivalent comparison.
Zero-coupon bonds are issued at a discount with no periodic interest, while high-yield bonds carry lower ratings and higher default risk.
Pooled Investment Vehicles
Open-end mutual funds continuously issue and redeem shares at net asset value calculated at the daily close.
Closed-end funds have a fixed share count and trade on exchanges at a premium or discount to NAV.
ETFs offer diversified, low-cost, intraday-traded, generally tax-efficient exposure, and UITs hold a fixed portfolio with a set termination date.
REITs must distribute a large majority of taxable income to qualify for pass-through treatment, providing real estate exposure and income.
Derivatives
A call option gives the holder the right to buy the underlying at the strike price before expiration; a put gives the right to sell.
Puts are used to speculate on or hedge against price declines in the underlying.
Writing a covered call generates premium income while capping upside on shares already owned.
Options involve leverage and time decay, requiring careful suitability review.
Insurance-Based Products
Variable annuity subaccount values fluctuate with market performance, so the holder bears investment risk and the product is a security.
Fixed annuities provide a guaranteed minimum rate with the insurer bearing investment risk, and are generally insurance products rather than securities.
Fixed-indexed annuities credit interest tied to an index subject to caps, participation rates, and floors, making suitability review essential.
Insurance-based guarantees depend on the issuing insurer's claims-paying ability and are not FDIC insured.
Test your knowledge
Practice questions on Investment Vehicle Characteristics
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Last updated: July 2026