Financial Markets and Investment Products
Core concepts
Candidates must map the product universe and the markets where it trades. Know equities (ownership, dividends, voting), fixed income (coupon, yield, duration, credit spread, call/put features), money-market instruments (T-bills, commercial paper), derivatives (futures, options, swaps - leverage and counterparty risk), and pooled vehicles (mutual funds, ETFs, hedge funds, REITs). Understand primary versus secondary markets, market makers, bid-ask spreads, liquidity, and settlement. For each product, be able to state the return source, the main risks, and who bears them.
Traps in questions
Examiners test yield versus price direction (bond prices fall when yields rise), ETF versus mutual fund mechanics (intraday trading and creation/redemption vs. end-of-day NAV), and derivative leverage (small moves in the underlying produce large percentage changes in the derivative). Watch for confusing duration (sensitivity to rates) with maturity, and for options terminology: buyer versus writer, call versus put, premium versus strike.
Worked rule of thumb
For bonds, use the inverse relationship: yield up → price down. A quick sensitivity estimate is price change ≈ −duration × change in yield. A bond with duration 5 facing a 1% rate rise loses roughly 5% in price. For derivatives, remember the writer of an option has limited gain (premium) but potentially large loss; the buyer has limited loss (premium) and potentially large gain.
Exam strategy
For each product in a question, ask: what is the return source, what is the dominant risk, and who is on each side of the trade?