Asset Classes Details

Now we will go into the details of each asset class. Although this is the equity chapter, the CFA material also covers other asset classes here, so we will follow it as presented.

Fixed Income Instruments

The first asset class is Fixed Income Instruments. You already know there is a dedicated Fixed Income topic, with a chapter for each asset class we are reviewing now. Here, we will only cover what is necessary to answer Equity-related questions.

For fixed income, we need to distinguish between short-term instruments and bonds and notes.

• Short-term instruments: securities with maturities of one year or less
• Examples: government bills, certificates of deposit (issued by banks), commercial papers (issued by corporations), and repos (issued by either)

Bonds and notes are issued by both corporations and governments. Generally, T-notes refer to shorter-term maturities, and T-bonds to longer maturities. However, the CFA curriculum notes that there is overlap between terms, typically around 8–12 years, so the distinction is not critical. Both represent long-term financing instruments.

Some corporations issue convertible bonds, which can be converted into equity (shares).

Equities

There are three groups of equity instruments:

1. Common shares
2. Preferred shares
3. Warrants

Common Shares

Common shares represent residual ownership rights—in case of liquidation, common shareholders are the last to receive assets, after bondholders and preferred shareholders. They have the right to receive declared dividends and voting rights, giving them control over management selection.

Preferred Shares

Preferred shares entitle holders to dividends, often at a fixed rate linked to their class. In the U.S., companies may issue multiple classes of preferred shares, each with its own fixed dividend percentage, giving them fixed-income-like characteristics. Preferred shareholders have higher claims on assets in liquidation than common shareholders.

Warrants

Warrants are securities that allow holders to purchase another security from the issuing company, usually common stock. Warrants can later be converted into common shares and have hybrid characteristics between fixed income and equity.

Pooled Investment Vehicles

These are investment funds, and it is essential to understand the difference between open-end and closed-end structures.

• Closed-end funds: include hedge funds and private equity funds. After raising capital, they close to new investors. Investors cannot redeem directly with the fund; they must sell in the secondary market, usually at a discount due to liquidity costs.
• Open-end funds: include mutual funds, where investors redeem directly with the fund at the Net Asset Value (NAV).

ETFs

Exchange-Traded Funds (ETFs) are open-end funds traded in secondary markets. The ETF’s NAV represents the value of its underlying assets. The market price remains close to the NAV due to Authorized Participants who issue and redeem ETF shares to enforce price alignment through arbitrage.

Even though ETFs are open-end by structure, they are traded in secondary markets.