A retiree's portfolio holds Treasury bonds, a bank's preferred stock, ADRs of a Brazilian miner, and a callable corporate bond. Each instrument carries a different risk profile and a different reaction to rising rates, a falling dollar, or a credit downgrade. The SIE tests whether you can match product to risk.
Equity represents ownership. When you buy a share of common stock, you own a fractional slice of the company. Equity holders are the residual claimants. Everyone else (bondholders, preferred shareholders, suppliers, employees) gets paid first in liquidation.
Common stock conveys three core rights:
- Voting rights. One vote per share on board elections, mergers, and major corporate actions. Statutory voting lets you cast one vote per share per director slot.
- Dividend rights. Common dividends are discretionary. The board declares them; they are never guaranteed. Dividends are paid after preferred dividends and bond interest.
- Residual claim. In bankruptcy, common shareholders receive whatever is left after secured creditors, unsecured creditors, and preferred shareholders are satisfied. That is often zero.
Common mistakes
- Confusing rights with warrants. Rights are short-term (30 to 45 days) at a discount to market. Warrants are long-term (years) at a premium to market.
- Thinking preferred stock votes. Preferred typically has no voting rights absent missed dividends triggering contingent voting clauses.
- Quoting yield to maturity on a premium callable bond. Always quote the lower of YTM and YTC. For premium callables, YTC is lower.
Bottom line
- Common stock = ownership, voting, last in liquidation; preferred = fixed dividend, no voting, ahead of common but behind bonds
- Rights are short-term at a discount to market; warrants are long-term at a premium to market
- ADRs let U.S. investors buy foreign equities in dollars but add currency and political risk
- Bond prices and yields move inversely; longer duration and lower coupon = more price sensitivity
Exam shortcut
"Rates up, prices down" is the entire fixed income chapter in one sentence. The longer the maturity and the lower the coupon, the bigger the price move. Always quote the lower yield. Premium callable bonds quote YTC; discount bonds quote YTM. Choose the conservative number.
The full lesson (about 3,358 words, 22 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- B5
- B6
- B11
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