Investment Vehicle Characteristics
Core map
Equities: common stock (residual claim, voting), preferred (fixed dividend, senior, often callable, usually nonvoting), ADRs (foreign shares with currency and political risk), rights (short-dated, subscription price below market, anti-dilutive), warrants (long-dated, exercise price above market at issue).
Fixed income: price moves inversely to yield. A premium bond has a coupon above its YTM and pulls toward par as maturity nears; a discount bond has a coupon below YTM. Duration measures price sensitivity and is shorter than maturity for any coupon bond; for a zero-coupon bond, duration equals maturity. Yield to worst considers calls and puts. Munis split into general obligation (taxing power) and revenue (project) bonds; TIPS adjust principal for CPI.
Packaged products: open-end funds price at NAV once daily; closed-end funds trade at market price and may sit at a premium or discount; ETFs trade intraday with in-kind creation and low capital-gains distributions; UITs are unmanaged fixed portfolios; hedge funds use leverage and performance fees and are limited to accredited investors; REITs must distribute 90% of taxable income; variable annuities are insurance-wrapped tax-deferred subaccounts.
Traps
- Confusing current yield with yield to maturity.
- Thinking a call feature favors the investor - it favors the issuer.
- Assuming a high coupon means safety; it mainly adds reinvestment risk.
- Mixing NAV and market price for closed-end funds.
- Forgetting the 100-share option multiplier.
Rule of thumb
Approximate price change ≈ −duration × change in yield. A 7-year duration bond loses roughly 7% if yields rise 1%.
Worked example
A 6% coupon, 10-year bond priced at 108 yields about 4.9% to maturity - below the coupon because the premium amortizes. If rates rise, the price falls toward par.