Ch. 11 Flashcards
T/F: A Section 3 (c) (7) hedge fund may contain performance based fees.
True. However, investors should understand the fee structure of a hedge fund.
Define insured.
The person whose life is covered by an insurance contract
Who assumes the investment risk in a traditional insurance contract?
The insurance company
Bill shorts July soybeans at $15. If he later covers the sale at $15.25 what is his profit/loss?
Since soybean futures have 5,000 bushels/contract and Bill lost $.25/bushel, his total loss is $1,250 ($.25 x 5,000)
Calls and puts are the two ________ of options.
Types
A call option gives the owner the right to ______.
Buy
An investor holds 1 XYZ January 80 Put at 5. What is her break even point?
75
T/F: Forward contracts are exchange traded.
F; Futures, not forwards, trade on the exchanges
If a clients goal is preservation of principal, what fund would be most appropriate?
Money market fund
A put option gives the owner the right to ________.
Sell
Identify the position: An investor buys 1 GDG Mar 50 call at 4 and buys 1 GDG Mar 50 put at 4.
A straddle, which is the purchase or sale of both a call and a put with the same stock, expiration and strike price
Define leverage investing.
Using borrowed funds to buy securities (margin trading) that may lead to greater returns and losses
If performance in a given period equals the AIR, the next payment will_____________.
Remain constant
T/F: Investors may buy options in an effort to hedge stock positions.
T
T/F: Limited partners are taxed when they receive a distribution from the partnership.
F; partners are taxed in the year in which the income is reported, not in the year in which it is received.
An investor buys a March corn contract at $6,000. If the contract is later closed out at $6.05, what is the profit/loss?
Since corn futures have 5,000 bushels/contract and the investor makes $.05/bushel, the profit is $250 ($.05 x 5,000)
Investors who want to generate income on a stock position should _______ an option.
Sell
T/F: Performance must be negative for a variable annuity’s payment to fall.
F; performance below the AIR will cause the payment to fall, even if the interment result was positive
An investor sells 1 ABC Jan 50 call at 2 and sells 1 ABC Jan put at 3. What is the investors strategy?
Stability
To invest in a limited partnership, a. Investor must complete the _________ __________.
Subscription Agreement
An investor buys 1 XYZ Dec 70 call at 4 and buys 1 XYZ Dec 70 put at 4. What is the investors strategy?
Volatility
T/F: The AIR is a guaranteed minimum rate of return.
F; the AIR is a benchmark rate that is not guaranteed
What is a fund of funds?
A mutual fund that invests in other multiple hedge funds
Does a term life policy have cash value?
No. Term life is pure insurance
At annuitization (payout), accumulation units are exchanged for ________ units.
Annuity
Which interest rates are generally more volatile?
Short term rates
T/F: Contribution limits and employment requirements apply to both qualified and non qualified plans.
F; contribution limits and employment requirements apply to qualified plans only.
If an approved formula is used, may an IAR project the future reformable of a variable annuity?
No. Projecting a variable annuity’s performance is never permitted
If exercised against, the writer of an equity call option is obligated to ____ the underlying stock.
Sell
In a limited partnership, when is a limited partner taxed on any generated income?
In the year in which the income is reported (declared)
What technique can be used to roll assets from one annuity into another without taxation?
A 1035 Exchange
Name some of the different types of money market instruments.
T-bills, BAs, commercial paper, negotiable CDs
T/F: Covered call writing is a conservative option strategy that is designed to generate income.
T
What is not considered a derivative?
Mutual funds, stocks, bonds, and notes
T/F: Options are derivatives since their value is based on the changing value of an underlying instrument.
T
What type of fund uses leverage, derivatives, and short positions, and invests in illiquid asset classes?
A hedge fund
Who assumes the investment risk in a variable insurance contract?
The client
What is easier to offset, a futures contract or a cash forward?
Futures contracts are easier to offset; forwards are generally non transferable
What modification is made to the straight life payout option to guarantee payments for a minimum number of years?
Straight life with period certain
Describe term life insurance.
A life insurance policy that pays a death benefit to a beneficiary if the insured dies within the term specified
May hedge funds sell stocks short and use margin?
Yes
Define duration.
The measure, expressed in years, of a bonds price sensitivity to interest rate changes
T/F: The market price of closed end shares could be higher, lower, or equal to the NAV.
T; Shares can trade at a premium or discount to NAV based on supply and demand forces
Which annuity payout option provides for the greatest monthly payment?
Straight life
Is a CMO considered a derivative?
Yes
An investor writes 1 DEF May 55 call at 6. What is the investors strategy?
Bearish
Long (buying) calls may be used to hedge a ______ stock position.
Short
An investor buys 100 shares of IBM at 91 and also 1 IBM Nov 90 put at 2. Is the investor bullish or bearish on IBM?
Bullish since they are long the stock. The put is purchased to protect downside risk.
A 62 year old investor makes a full withdrawal from her non qualified annuity. What is the tax consequence?
She is taxed on the earnings at her ordinary income rate
With options, what terms are synonymous with buyer?
Owner, holder, long
Describe a whole life policy.
A policy providing death benefit protection for life or to age 100, cash value, level death benefit, and level premium
Sandra buys 1 ABC Dec 70 call at 4. What is Sandra’s breakeven point?
74
Identify the acronym: AIR
Assumed Interest Rate
Lost some of the characteristics of hedge funds.
Hedge funds are often leveraged, unregistered, and illiquid
After the initial offering, where are shares of a closed end management company purchased?
In the secondary market (like shares of stock)
T/F: Forward contracts are standardized
F; futures, not forwards, are standardized by a futures exchange
What type of oil and gas program drills for new oil reserves in unproven areas?
Exploratory (wildcatting)
An investor holds 1 XYZ Jan 80 put at 5. What is her strategy?
Bearish (to find strategy for put buyers, use the phrase PUT DOWN)
Prior to selling a DPP, passive losses can only be used as deductions against _____________.
Passive income
Does a variable life policy have a guaranteed minimum death benefit?
Yes. Regardless of account performance, the minimum DB is paid (typically, the initial DB listed on the policy’s face)
Give some examples of financial derivatives.
Rights, warrants, swaps, forwards, options, and structured or ETNs
Long (buying) puts may be used to hedge ______ stock positions.
Long
Variable contract assets are placed in the insurance company’s _________ account.
Separate
T/F: Passive income is income derived from dividends and interest generated by securities in a portfolio
F; passive income is derived from an investment in a DPP
May a firm advertise a hedge fund being offered through a Reg D private placement to the general public?
Yes. Under Rule 506 (c), general advertising is permitted; however, sales are limited to accredited investors
What type of insurance policy expires at the end of a specified period?
Term life insurance. Whole, universal, and variable life insurance policies do not have a preset expiration
Is registration required for a Section 3(c) (1) hedge fund?
No. Section 3(c) (1) hedge funds are exempt from registration under the Investment Company Act of 1940
Define futures contract.
An agreement to buy or sell a specific amount of a commodity on a stipulated date in the future
T/F: LEAPS and interest rate swaps are derivatives.
T; both LEAPS and swaps are derivatives.
Given a yield change, __________ bonds move more in price.
Long term (lower coupon or longer duration are also correct)
Identify the acronym: EIA
Equity indexes annuity
Identify the acronym: TSA
Tax sheltered annuity (a qualified contract)
Describe the inverse relationship between market interest rates and the prices of existing bonds.
As interest rates rise, existing bond prices fall, and as interest rates fall, existing bond prices rise.
Exploratory drilling is also referred to as ______________.
Wildcatting
The _____________ the duration, the greater the bonds price sensitivity.
Longer/greater
What is a derivative?
A financial product that derives its value from the value of underlying assets such as stocks, bonds, or mortgages.
If performance in a given period is greater than the AIR, the next payment will ____________.
Increase
What are the two main uses of futures?
The two main uses are hedging and speculation
Does an equity indexed annuity transaction require the delivery of a prospectus?
No, these contracts are not considered securities by the SEC
T/F: A RR may present variable annuity performance projections.
F; projecting variable annuity performance is prohibited
T/F: Variable annuities are subject to registration requirements of the Act of 1933 and sold by prospectus.
T
Prospectus drivers is required for all _________ insurance contracts.
Variable
An investor buys 100 shares of RST at 30 and sells 1 RST Oct 35 call at 2. What is the reason for selling the call?
To provide premium income on stable stock. Also note the premium provides a partial hedge against downside risk
Describe the liability of the two partners in a limited partnership
General partners have unlimited liability, while limited partners have a limited liability
If exercised against, the writer of an equity put option is obligated to ______ the underlying stock.
Buy
Name three important factors for determining the premium of an equity option
The stock market price versus the strike price, time left until expiration, and volatility of the underlying security
A mutual fund that focuses on a company’s year to year earnings momentum is considered a _______ fund.
Growth
Describe whole life insurance.
A life insurance policy that has a fixed death benefit, fix premium payments, and builds cash value over time.
When the term life policy expires and is renewed, will the premium be higher, lower, or stay the same?
Higher, since the insured is older and riskier to insure.
Mae loans be taken against variable life policy?
Yes, for a portion of the contracts cash value
Describe inflation, or purchasing power risk.
The risk that today’s investment will not be worth as much money is received in the future.
Is a hedge fund investment considered liquid?
No
T/F: deferred compensation plans are tax deductible.
False. Employee deferrals in Corporate contributions are not tax deductible until actually paid.
When my American style options be exercise?
On any business day, up to the expiration date
___________ is a form of life insurance that may be suitable for people with a fix time horizon
Term life
Describe universal life insurance.
A permanent life insurance policy designed so the policy owner may adjust the death benefit in premium payments
Jim is short 1 MNO August 40 put at 4.50. What is Jim’s breakeven point?
35.50
A client has annuitize her contract under the street life option in soon dies. What is her death benefit?
Zero dollars. There is no death benefit post annuitization, since the contract is based on her life only.
An investor writes 1 DEF May 55 call at 6. What is the breakeven point?
61
T/off: when interest rates, go up, bond, prices, go up, and when interest rates, go down, bond prices, go down
False. There’s an inverse relationship between interest rates and prices.
T/F: in a straight life annuity, payout option, no beneficiary will receive payments at the annuitant death.
True. All payments cease upon the annuitant death.
A __________ plan has no contribution limit.
Non qualified
T/F: income programs, purchase already producing Wells, but offer few intangible, drilling costs. I
True
T/F: cash forwards can be for any amount of a commodity.
True. Cash for transactions are negotiated between a buyer and a seller and can be for any amount.
__________ is suitable for a client who is willing to assume market risk
Variable life insurance
Describe variable life insurance.
A life policy, where the death benefit varies, depending upon the performance of the investment options
T/F: European options are considered derivatives because they may only be exercised at expiration
False. European options are considered derivatives because their value is derived from an underlying security.
Is a person who invest in a variable annuity, more susceptible to legislative risk or investment risk?
Investment risk since the separate account of variable annuity fluctuates with the overall performance of the market
T/F: investor cell coverage options in order to generate income
True. By selling the option, the sellers immediately credited with the premium.
Money market securities have a maturity of _____________.
One year or less
Identify the acronym: VLI
Variable life insurance
Identify the position: An investor sells 1 ELG May 75 call at 6 and sells 1 ELG May 75 put at 6.
Astraddle, which is the purchase or sale of both a call and I put with the same stock, expiration, and strike price
An annuity with growth dependent on the performance of securities in a separate account is called ____________ annuity.
Variable.
Over development and high leverage of the risk associated with a _______ ___________ Program.
New construction
T/F: to hedge of stock position, buying options, provides more protection than writing options.
True. When long stock investors may buy a put. When short stock, investors made buy a call.
___________ drilling programs drill improve in areas.
Developmental
T/off: an investor who has already annuitized a variable annuity, may roll it over into an IRA
False. Once annuitization begins, rollover is no longer permitted.
In a nonqualified annuity, how was the payout taxed?
Only the earnings portion of subject to tax as ordinary income
What is a covered call position?
The sale of a call against stock that is owned
The ________ partner is in charge of management in decision making for the partnership.
General
When calculating the POP for a mutual fund, the sales charge is added to the __________.
NAV
Do long-term bonds, have higher or lower interest-rate risk?
Higher
The money invested in a variable annuity is used to buy ________ _________.
Accumulation units (similar to mutual fund shares)
Traditional contract assets are placed in the insurance company’s __________ account.
General
Which contract trade on centralize exchanges, futures or forwards?
Futures
Identify the risk of existing bond prices declining well interest rates are rising.
Interest-rate risk
T/F: on average, variable annuities, have lower fees, and expenses than mutual funds.
F
Gold, silver, platinum, and palladium are considered ___________.
Precious metals
Copper, lead, tin, and zinc are considered ______________.
Non precious metals
With options, what terms are synonymous with seller?
Writer, short
T/S: buying call options is a leverage position.
True. Buying options allows you to pay a little to have control of a larger position
Which type of annuity is considered a security, fixed or variable?
Variable
What is the dollar limit that may be contributed annually to a nonqualified annuity?
There is no contribution limit
T/S: close, and fun chairs are valued at their NAV at the close of the market each day
Foss. Close and Scherzer price intraday. They trade constantly at a price that may be discounted or premium to NAV.
What is the primary benefit of including insurance in a financial plan?
To transfer to an insurance company, the risk of losing a persons wages due to death
What payout option requires the insurance company to provide payments for as long as one of two people remain alive?
Joint and last Survivor
Sandra buys 1 ABC Dec 70 call at 4. What is Sandra’s strategy?
Bullish
What is the 1035 exchange?
Attacks free exchange of one annuity for another. These exchanges are allowed under section 1035 of the tax code.
Who typically buys hedge funds?
Accredited or sophisticated investors through regulation D offerings
Which of the following is not a security: an equity, indexed annuity, variable life policy, bank stock, or swap contract?
Equity indexed annuities are a type of fixed annuity and are therefore not securities
A variable annuity is most suitable for a client who is seeking _________ __________
Over a long period.
Seeking capital appreciation
T/F: an investor may lose money when investing in an equity indexed annuity.
False. Equity indexed annuities have a guaranteed minimum rate of return.
Our life insurance death benefits taxable?
No. Death benefits are receive tax free.
And investor wants to invest in bonds so she can buy a car in two years. What is an appropriate recommendation?
Buying bonds with less than two years to maturity would be best. Money market securities would also be suitable.
At Annuitization, what will determine the annuitant payment?
Affix number of annuity units with a fluctuating value per unit
What happens when an investor is passive losses exceed her passive income?
She is able to carry forward the passive losses
All variable contract premiums are placed in the insurance company’s _________ account. 
Separate
Can a variable life policy’s death benefit grow over time?
Yes. If the account performance is positive, the benefit will increase.
An investor writes 1 DEF May 55 call at 6. Later at expiration, if DEF has fallen to 53, is there a gain or loss?
$600 gain on the premium
What does a limited partnership subscription agreement state in regard to a purchaser?
He is aware of risks, can meet suitability standards, has red disclosure documents, and knows the required investment.
Is performance in a given period is below the AIR, the next payment will _____________.
Decrease
