Let’s try a practice question:
A client who is looking for monthly income from an investment might be most interested in which of the following products?
- Top-rated equity REIT
- Plain vanilla CMO
- Convertible preferred stock of a Fortune 500 company.
- Convertible debenture of NYSE-listed telecom company.
The correct answer is 2.
The single thing here is monthly income. You can start by asking yourself and going down the list of answer choices saying, “what is the timeline that these four products generate any type of cash flows to investors?” We invest in these things because we get some type of interest or dividends. Therefore, we assume they all make some type of investment income payments to us.
Top Rated Equity; REIT.
Top-rated equity REITs are real estate investment trusts. REITs will either pay quarterly or they will pay semiannually, like a lot of REITs they are equity-driven products. They will pay quarterly dividends, but not monthly.
Plain Vanilla CMO
It does not matter whether it’s plain vanilla or chocolate, or strawberry, it doesn’t make any difference at all. Mortgage-backed securities like CMOs are designed to make monthly interest payments to investors. This was the main takeaway point there. CMO means Collateralized Mortgage Obligations. Remember, even though the letter M in CMO stands for mortgage, you could do like a little trick to help remind yourself that “M” technically means mortgage, it could also mean monthly. We know that everybody who has a mortgage makes their mortgage payment on a monthly basis. M monthly, even though in real life, it means a mortgage.
Convertible Preferred Stock
This is a stock that pays a quarterly dividend. Every company that’s in the Fortune 500, If they are paying dividends, they are paying dividends four times a year. For example, companies such as Coca-Cola, Apple, Ford Motor, and Yahoo.
Convertible Debenture of a NYSE- listed Telecom Company.
A debenture is a bond, and bonds pay interest not four times a year, but two times a year, semi-annually.