Investment Vehicles and Asset Classes
Vehicles and their economics
Candidates must place any product on a map of liquidity, credit quality, interest-rate sensitivity, and tax treatment. Cash equivalents (T-bills, CDs, money market funds) offer liquidity with minimal price risk. Bonds - Treasury, agency, municipal, corporate - are loans with coupon, maturity, call, and credit features; Treasury interest is exempt from state tax, municipal interest is generally exempt from federal tax (and state tax in-state), corporate interest is fully taxable. Equities (common, preferred) are ownership; preferred is a hybrid with a stated dividend and seniority. Packaged products include open-end mutual funds (priced at NAV once daily), ETFs (intraday trading, generally more tax-efficient due to in-kind creation/redemption), closed-end funds (fixed share count, trading at premiums or discounts to NAV), and unit investment trusts (fixed, terminating portfolios). Also know REITs, annuities (accumulation vs. payout; qualified vs. nonqualified), and private/hedge vehicles with lockups and accredited-investor rules.
Traps. ETF is not the same as mutual fund for trading and taxes; CEF premiums/discounts puzzle candidates; UITs have termination dates; and the expense ratio is not the sales load.
Worked example. A client in the 32% bracket compares a 3.00% municipal bond with a taxable bond. Tax-equivalent yield = 3.00% ÷ (1 − 0.32) = 4.41%. The taxable bond must beat 4.41% to win - and remember state tax if the muni is out-of-state.