Asset Classes Overview

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Questions and Answers

Which of the following best describes the relationship between risk and yield for corporate and government bonds?

Government bonds have a higher yield due to lower risk.

Corporate bonds have a higher yield due to higher risk. (correct)

Both corporate and government bonds have the same yield.

Corporate bonds have a lower yield due to higher risk.

What is the primary difference between preferred and common shares concerning dividends?

Preferred shares receive dividends before common shares. (correct)

Common shares receive dividends before preferred shares.

Only common shares are entitled to dividends.

Both preferred and common shares receive dividends at the same time.

What is a key characteristic of a GIC (Guaranteed Investment Certificate)?

It offers variable returns based on the market.

It offers a guaranteed rate of return over a fixed period. (correct)

It has no maturity date and funds can be withdrawn at any time.

It carries high risk due to market fluctuation.

What does 'capital gain' refer to in the context of investments?

The profit made from selling an investment for more than its purchase price. Signup and view all the answers

How are T-Bills typically sold and redeemed?

They are sold at a discount, and the full face value is paid at the end of the term. Signup and view all the answers

Which of the following is a characteristic of common shares but not preferred shares?

Voting rights in the company. Signup and view all the answers

What is the defining feature of a short term GIC?

They have a short redemption date, allowing funds to be removed within a much shorter time period like a month. Signup and view all the answers

What does 'dividend yield' indicate about a stock?

The percentage of a stock's price being paid out as dividends. Signup and view all the answers

What does the bid price in the context of equity trading represent?

The highest price a buyer is willing to pay for a share. Signup and view all the answers

Which of the following best describes the Earnings Per Share (EPS) metric?

A valuation metric of a firm's profitability, calculated as (Net income - preferred dividends)/Average shares outstanding. Signup and view all the answers

Which type of stock is most likely to be heavily influenced by overall economic trends?

Cyclical stocks Signup and view all the answers

A company's share price is $50, and its annual EPS is $2. What is the Price-to-Earnings (PE) ratio?

25 Signup and view all the answers

In the context of bond investing, what does the 'yield' refer to?

The annual interest payment received as a return on the loan, based on the purchase price. Signup and view all the answers

What happens to the price of existing bonds when interest rates increase?

The price of existing bonds decreases. Signup and view all the answers

Which of the following describes a 'primary market'?

Where a company sells new stocks or bonds for the first time. Signup and view all the answers

How is the Net Asset Value (NAV) of a mutual fund calculated?

(Total Assets - Total Liabilities) / Number of Units Available Signup and view all the answers

Which market condition is characterized by rising share prices and increased investor confidence?

A bull market. Signup and view all the answers

What is the key difference between an Exchange-Traded Fund (ETF) and a mutual fund in terms of management?

ETFs are passively managed, while mutual funds are actively managed. Signup and view all the answers

Study Notes

Asset Classes

Equities: Variable risk; American and Canadian equities are medium to high-risk; international equities are higher-risk. Involve purchasing shares of publicly traded firms; shares are listed on public exchanges. Buyers and sellers match, hoping for a fair price. Different share types have different rights.
- Preferred shares: Blend equity and fixed income; provide ownership without voting rights; dividend payments prioritized, fixed dividend rate, unpaid dividends accumulate.
- Common shares: Often cheaper than preferred shares, higher volatility; last in line for dividends; offer voting rights.
- Stock market: Governed by laws of supply and demand.
Fixed Income (Bonds): A form of debt-equity. Bond purchasers loan money to corporations or governments. Interest is paid (yield) until maturity.
- Corporate bonds: Higher risk, higher yield.
- Government bonds: Lower risk, lower yield. Some governments offer 100% bond guarantees.
- Maturity date: Bonds have a fixed expiration date.
GICs (Guaranteed Investment Certificates): Secure accounts with 100% principal protection; offer a guaranteed rate of return for a set period. Funds are locked in until redemption date, removal is possible with penalties. Very low risk.
Cash Equivalents and Money Market Instruments (T-Bills): Risk-free, backed by the government; short-term (less than 1 year) maturity; sold at a discount. High liquidity. Short-term GICs have similar structure, but much shorter redemption periods.

Aspects of Stocks

Dividend: Money companies pay to shareholders, usually quarterly; yield is a percentage of the stock price, and varies by company and financial situation.
Capital Gain: Profit from selling property or investments; includes profit from stock sales, taxed differently based on holding period (Short-term vs. Long-term).
Bid & Ask: Concepts related to equity purchases and supply/demand. "Bid" is the buyer's highest offer; "ask" is the seller's lowest offer; "spread" is the difference.
Return: Investment gain or loss over time; calculated by comparing purchase price to current market price.
EPS (Earnings Per Share): A measure of a firm's profitability; calculated as (Net Income - Preferred Dividends) / Average Outstanding Shares; higher EPS indicates more profit relative to share price.

Types of Stocks

Stalwarts: Large, established firms with growth potential (e.g., Coca-Cola, P&G).
Fast Growers: Companies experiencing rapid growth, often in emerging or trending sectors (e.g., AI firms).
Cyclicals: Stocks' performance tied to the broader economy (e.g., Ford Motor Company).
Slow Growers: Stocks with lower volatility and slower growth rates (e.g., Verizon, Telus, AT&T).
Penny Stocks: Stocks trading below $1, considered speculative, high volatility, heavily influenced by individual ownership.

Stock Valuation Metrics

PE Ratio (Price-to-Earnings Ratio): Ratio of earnings to share price; indicates company valuation (high PE = investors are willing to pay a premium for the company's earnings). Calculated as Share Price/Annual EPS
Market Capitalization: Overall value of a company; calculated as Share Price × Number of Outstanding Shares.

Stock Market

Primary Market: Firms sell new stocks and bonds for the first time.
Secondary Market: Stocks and bonds are sold later (e.g., NYSE, TSX).
Market Conditions:
- Bull Market: Rising share prices, encourage buying, associated with positive economic times.
- Bear Market: Falling share prices, encourage selling, associated with poor economic conditions.
Volume: Number of shares traded in a specific period.
Open: The price the stock started trading at for the day.
Change: Difference in the stock price since the last closing price.
Range: Highest and lowest prices during a trading period.

Mutual Funds & ETFs

Mutual Funds: Investments from multiple investors, pooled money to buy various stocks and bonds. Diversification at a low cost, managed by a third party; value based on NAV (Net Asset Value). Management expenses are deducted daily.
ETFs: Collections of securities tied to an index (often passively managed). Allows mirroring market performance; lower costs and more flexibility but potentially more risk than mutual funds.

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Description

Test your knowledge on various asset classes, including equities and fixed income. Understand the differences between common and preferred shares, as well as the types of bonds and their associated risks and yields. This quiz will help you grasp essential investing concepts for stocks and bonds.