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SIE Exam - Debt Securities Risks (2020) - YouTube
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what's up guys in this video you're
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going to learn all about investment
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risks of debt securities as they pertain
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to the sae exam hi I'm Kelley McGraw and
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I'm going to help you pass your fender
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exam the first time
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debt securities differ from equity
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securities and that you don't actually
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own any part of the company or a shares
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of it you're actually just loaning money
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to a municipality the government
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Treasury or corporation and these kind
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of securities comes with their own
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specific risks that you need to be able
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to identify on the SIUE example the book
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just lays these things out for you and
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defines them but doesn't really classify
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them the way you can you can look at
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these risks and associate five or six of
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them with debt securities only so when
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you're in the test and you see a
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specific kind of risk you know exactly
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what they're talking about first kind of
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risk is credit or default risk are they
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going to pay you the next risk is
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interest rate risk and with bonds
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especially the price has an inverse
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relationship with interest rates so
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interest rate risk is the risk that
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interest rates will rise broaden prices
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will fall and vice versa next up is
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reinvestment risk which is a type of
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interest rate risk in itself basically
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when you're invested in a bond and
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you're getting a percentage and then all
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of the sudden interest rates drop and
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the money that you are being paid out on
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your bond when you go to reinvestment
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you can't get that same percentage when
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you go back to the market so if you have
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arbitrary numbers some eight percent
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bond and you go and you want to reinvest
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that money when it gets paid out to you
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but now interest rates are lower and you
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can only get a six percent bond it's a
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risk you take in just a little tip when
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it comes to reinvestment risk zero
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coupon bonds have no reinvestment risk
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because zero coupon bonds don't pay out
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interest a non systematic risk that ties
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in to reinvestment risk is call risk so
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you own this bond at eight percent
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and interest rates fall and you don't
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have call protection on your bond that
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corporate entity can call your bond
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after a certain amount of time so it can
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get the lower interest rate of the
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market and have to pay out less interest
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for the same amount of money you on the
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other hand are stuck with money and have
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to reinvest it and are going to be
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getting less now one real crossover when
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it comes to risk with equity and debt
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securities and that's inflation risk
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right you're being paid out 80% every
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year and inflation you know one point
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two two percent whatever it is a year
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that money that you're getting paid out
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is less is worth less each year the
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percentage being paid out does not
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adjust for inflation so you're subject
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to that risk is your risk for immunise
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is a change in the tax code legislative
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risk so these are you know attractive
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because they are attacked sheltered
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death security you're investing in your
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local municipality and Uncle Sam's not
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gonna take as much money from you or any
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at least at the state level because he's
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happy to have your money the problem
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with that being is if there were to be
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some kind of legislative change say to a
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flat tax the municipality would not be
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as attractive anymore
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so with muni is you take on that
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legislative risk guys or the exam I know
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this doesn't really actually make sense
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in real life necessary but you got to
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learn to think in terms of the S ie for
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the SIUE exam every every single risk
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but I just listed only is for death
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securities with the exception of
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inflation
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if you hear any one of those risks you'd
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say that security here that's gonna help
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you so much on the exam
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when it comes for bird stock we are
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going to treat that just like a debt
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security preferred stock equals debt
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security when it comes to risk on the
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exam you will have five to ten questions
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on this stuff and if you hear any of the
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risks that I had listed before boom debt
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security or preferred stock anything
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else we're thinking equity to recap we
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got default risk or credit risk
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reinvestment risk inflation risk call
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risk and four municipalities in muni
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bonds we have legislative risk a change
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of the tax code get these down it is so
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easy to get these right on the exam but
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a lot of people miss them take your time
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study this and get them right every
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single time in the exam and give
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yourself a leg up I'm gonna keep putting
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out these short videos to help you with
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different parts of the SI e exam I'm
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kind of just right now going through the
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book and thinking about what would help
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you guys best I just took this a few
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months ago I know exactly what's on it I
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passed it the first time I want to help
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you guys do the same if you guys have
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any specific questions leave those in
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the comment section and I will get back
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to them immediately if you have any
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ideas or thoughts or anything you want
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in the next video if you comment I'll do
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it hit subscribe hit like thanks for
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watching guys let's make sure you guys
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have this SI exam the first time
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