Securities: Types, Features and Concepts of Asset Allocation and Investing

Hint Common mistake: Expecting equity dividends to behave like fixed bond interest. Compare the payment rights of an owner with those of a lender.

Hint Common mistake: Multiplying the coupon rate by the bond’s current market price. Recall the value on which the contractual interest is based.

Hint Common mistake: Thinking that a bond without interest payments cannot earn a return. Think about the timing of payments rather than the existence of return.

Hint Common mistake: Assuming preference shares rank above all company debt. Compare preference shareholders with ordinary shareholders, not creditors.

Hint Common mistake: Assuming that convertibility removes debt-related risks. Focus on how the nature of the investor’s claim may change.

Hint Common mistake: Treating every investible asset as a company-issued security. Look for a physical raw material.

Hint Common mistake: Confusing risk reduction with a guarantee against losses. Think about the effect of one investment performing poorly.

Hint Common mistake: Assuming a quoted price means a large holding can be sold at that price. Focus on the ease and cost of exiting an investment.

Hint Common mistake: Treating a valuation estimate as an assured future price. Separate an analyst’s estimate from an observed transaction.

Hint Common mistake: Assuming that the debt component makes every structured payoff safe. Look for a product built by combining different financial components.

Hint Common mistake: Including repayment of principal when only interest is requested. Use the bond’s face value as the interest base.

Hint Common mistake: Using face value instead of market price to calculate current yield. Relate the annual income to the amount paid for the bond.

Hint Common mistake: Assuming that a higher market interest rate increases every bond’s price. Think about whether the old fixed payments become more or less attractive.

Hint Common mistake: Treating a deep discount as proof of a bargain. Consider what financial distress means for promised payments.

Hint Common mistake: Considering only financing cost while ignoring payment obligations. Compare contractual repayment commitments with ownership financing.

Hint Common mistake: Dividing one asset class by another instead of by the total. Calculate the total portfolio value before finding its equity share.

Hint Common mistake: Choosing only by possible return and ignoring the date of the goal. Match the investment’s features to when the money is needed.

Hint Common mistake: Using the dividend amount alone as the yield. Compare annual dividend income with the share’s current price.

Hint Common mistake: Reversing the profit and share-count values in the division. Spread the profit available to ordinary shareholders across their shares.

Hint Common mistake: Subtracting earnings from price instead of calculating a multiple. Compare the share price with one share’s earnings.

Hint Common mistake: Reversing the ratio or mixing company-wide and per-share figures. Use both figures on the same per-share basis.

Hint Common mistake: Assuming a warrant holder automatically has all shareholder rights before exercise. Distinguish a future subscription right from present share ownership.

Hint Common mistake: Mistaking the depository bank for the company in which the investor has exposure. Look through the receipt to the security supporting it.

Hint Common mistake: Classifying any use of numbers as technical analysis. Compare analysis of a business with analysis of its market trading patterns.

Hint Common mistake: Applying the second year’s rate only to the original principal. Update the balance after the first year before calculating the second year.

Hint Common mistake: Subtracting a percentage instead of dividing by the compound-growth factor. Reverse two years of compound growth.

Hint Common mistake: Applying the target percentage only to the existing equity portion. Find the target equity value using the unchanged portfolio total.

Hint Common mistake: Ignoring dividends when calculating equity returns. Combine the price change and cash income before finding the percentage return.

Hint Common mistake: Treating a bond’s annual income yield as its complete return measure. Compare an annual-income ratio with a full cash-flow return measure.

Hint Common mistake: Treating a peer multiple as if it directly discounts the company’s own cash flows. Identify whether value comes from future cash flows or comparison with peers.