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S 66 > Ch. 11 > Flashcards

Ch. 11 Flashcards

1
Q

T/F: A Section 3 (c) (7) hedge fund may contain performance based fees.

A

True. However, investors should understand the fee structure of a hedge fund.

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2
Q

Define insured.

A

The person whose life is covered by an insurance contract

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3
Q

Who assumes the investment risk in a traditional insurance contract?

A

The insurance company

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4
Q

Bill shorts July soybeans at $15. If he later covers the sale at $15.25 what is his profit/loss?

A

Since soybean futures have 5,000 bushels/contract and Bill lost $.25/bushel, his total loss is $1,250 ($.25 x 5,000)

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5
Q

Calls and puts are the two ________ of options.

A

Types

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6
Q

A call option gives the owner the right to ______.

A

Buy

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7
Q

An investor holds 1 XYZ January 80 Put at 5. What is her break even point?

A

75

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8
Q

T/F: Forward contracts are exchange traded.

A

F; Futures, not forwards, trade on the exchanges

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9
Q

If a clients goal is preservation of principal, what fund would be most appropriate?

A

Money market fund

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10
Q

A put option gives the owner the right to ________.

A

Sell

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11
Q

Identify the position: An investor buys 1 GDG Mar 50 call at 4 and buys 1 GDG Mar 50 put at 4.

A

A straddle, which is the purchase or sale of both a call and a put with the same stock, expiration and strike price

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12
Q

Define leverage investing.

A

Using borrowed funds to buy securities (margin trading) that may lead to greater returns and losses

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13
Q

If performance in a given period equals the AIR, the next payment will_____________.

A

Remain constant

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14
Q

T/F: Investors may buy options in an effort to hedge stock positions.

A

T

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15
Q

T/F: Limited partners are taxed when they receive a distribution from the partnership.

A

F; partners are taxed in the year in which the income is reported, not in the year in which it is received.

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16
Q

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?

A

Since corn futures have 5,000 bushels/contract and the investor makes $.05/bushel, the profit is $250 ($.05 x 5,000)

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17
Q

Investors who want to generate income on a stock position should _______ an option.

A

Sell

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18
Q

T/F: Performance must be negative for a variable annuity’s payment to fall.

A

F; performance below the AIR will cause the payment to fall, even if the interment result was positive

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19
Q

An investor sells 1 ABC Jan 50 call at 2 and sells 1 ABC Jan put at 3. What is the investors strategy?

A

Stability

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20
Q

To invest in a limited partnership, a. Investor must complete the _________ __________.

A

Subscription Agreement

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21
Q

An investor buys 1 XYZ Dec 70 call at 4 and buys 1 XYZ Dec 70 put at 4. What is the investors strategy?

A

Volatility

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22
Q

T/F: The AIR is a guaranteed minimum rate of return.

A

F; the AIR is a benchmark rate that is not guaranteed

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23
Q

What is a fund of funds?

A

A mutual fund that invests in other multiple hedge funds

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24
Q

Does a term life policy have cash value?

A

No. Term life is pure insurance

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25
Q

At annuitization (payout), accumulation units are exchanged for ________ units.

A

Annuity

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26
Q

Which interest rates are generally more volatile?

A

Short term rates

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27
Q

T/F: Contribution limits and employment requirements apply to both qualified and non qualified plans.

A

F; contribution limits and employment requirements apply to qualified plans only.

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28
Q

If an approved formula is used, may an IAR project the future reformable of a variable annuity?

A

No. Projecting a variable annuity’s performance is never permitted

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29
Q

If exercised against, the writer of an equity call option is obligated to ____ the underlying stock.

A

Sell

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30
Q

In a limited partnership, when is a limited partner taxed on any generated income?

A

In the year in which the income is reported (declared)

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31
Q

What technique can be used to roll assets from one annuity into another without taxation?

A

A 1035 Exchange

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32
Q

Name some of the different types of money market instruments.

A

T-bills, BAs, commercial paper, negotiable CDs

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33
Q

T/F: Covered call writing is a conservative option strategy that is designed to generate income.

A

T

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34
Q

What is not considered a derivative?

A

Mutual funds, stocks, bonds, and notes

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35
Q

T/F: Options are derivatives since their value is based on the changing value of an underlying instrument.

A

T

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36
Q

What type of fund uses leverage, derivatives, and short positions, and invests in illiquid asset classes?

A

A hedge fund

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37
Q

Who assumes the investment risk in a variable insurance contract?

A

The client

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38
Q

What is easier to offset, a futures contract or a cash forward?

A

Futures contracts are easier to offset; forwards are generally non transferable

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39
Q

What modification is made to the straight life payout option to guarantee payments for a minimum number of years?

A

Straight life with period certain

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40
Q

Describe term life insurance.

A

A life insurance policy that pays a death benefit to a beneficiary if the insured dies within the term specified

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41
Q

May hedge funds sell stocks short and use margin?

A

Yes

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42
Q

Define duration.

A

The measure, expressed in years, of a bonds price sensitivity to interest rate changes

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43
Q

T/F: The market price of closed end shares could be higher, lower, or equal to the NAV.

A

T; Shares can trade at a premium or discount to NAV based on supply and demand forces

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44
Q

Which annuity payout option provides for the greatest monthly payment?

A

Straight life

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45
Q

Is a CMO considered a derivative?

A

Yes

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46
Q

An investor writes 1 DEF May 55 call at 6. What is the investors strategy?

A

Bearish

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47
Q

Long (buying) calls may be used to hedge a ______ stock position.

A

Short

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48
Q

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?

A

Bullish since they are long the stock. The put is purchased to protect downside risk.

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49
Q

A 62 year old investor makes a full withdrawal from her non qualified annuity. What is the tax consequence?

A

She is taxed on the earnings at her ordinary income rate

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50
Q

With options, what terms are synonymous with buyer?

A

Owner, holder, long

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51
Q

Describe a whole life policy.

A

A policy providing death benefit protection for life or to age 100, cash value, level death benefit, and level premium

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52
Q

Sandra buys 1 ABC Dec 70 call at 4. What is Sandra’s breakeven point?

A

74

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53
Q

Identify the acronym: AIR

A

Assumed Interest Rate

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54
Q

Lost some of the characteristics of hedge funds.

A

Hedge funds are often leveraged, unregistered, and illiquid

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55
Q

After the initial offering, where are shares of a closed end management company purchased?

A

In the secondary market (like shares of stock)

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56
Q

T/F: Forward contracts are standardized

A

F; futures, not forwards, are standardized by a futures exchange

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57
Q

What type of oil and gas program drills for new oil reserves in unproven areas?

A

Exploratory (wildcatting)

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58
Q

An investor holds 1 XYZ Jan 80 put at 5. What is her strategy?

A

Bearish (to find strategy for put buyers, use the phrase PUT DOWN)

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59
Q

Prior to selling a DPP, passive losses can only be used as deductions against _____________.

A

Passive income

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60
Q

Does a variable life policy have a guaranteed minimum death benefit?

A

Yes. Regardless of account performance, the minimum DB is paid (typically, the initial DB listed on the policy’s face)

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61
Q

Give some examples of financial derivatives.

A

Rights, warrants, swaps, forwards, options, and structured or ETNs

62
Q

Long (buying) puts may be used to hedge ______ stock positions.

A

Long

63
Q

Variable contract assets are placed in the insurance company’s _________ account.

A

Separate

64
Q

T/F: Passive income is income derived from dividends and interest generated by securities in a portfolio

A

F; passive income is derived from an investment in a DPP

65
Q

May a firm advertise a hedge fund being offered through a Reg D private placement to the general public?

A

Yes. Under Rule 506 (c), general advertising is permitted; however, sales are limited to accredited investors

66
Q

What type of insurance policy expires at the end of a specified period?

A

Term life insurance. Whole, universal, and variable life insurance policies do not have a preset expiration

67
Q

Is registration required for a Section 3(c) (1) hedge fund?

A

No. Section 3(c) (1) hedge funds are exempt from registration under the Investment Company Act of 1940

68
Q

Define futures contract.

A

An agreement to buy or sell a specific amount of a commodity on a stipulated date in the future

69
Q

T/F: LEAPS and interest rate swaps are derivatives.

A

T; both LEAPS and swaps are derivatives.

70
Q

Given a yield change, __________ bonds move more in price.

A

Long term (lower coupon or longer duration are also correct)

71
Q

Identify the acronym: EIA

A

Equity indexes annuity

72
Q

Identify the acronym: TSA

A

Tax sheltered annuity (a qualified contract)

73
Q

Describe the inverse relationship between market interest rates and the prices of existing bonds.

A

As interest rates rise, existing bond prices fall, and as interest rates fall, existing bond prices rise.

74
Q

Exploratory drilling is also referred to as ______________.

A

Wildcatting

75
Q

The _____________ the duration, the greater the bonds price sensitivity.

A

Longer/greater

76
Q

What is a derivative?

A

A financial product that derives its value from the value of underlying assets such as stocks, bonds, or mortgages.

77
Q

If performance in a given period is greater than the AIR, the next payment will ____________.

A

Increase

78
Q

What are the two main uses of futures?

A

The two main uses are hedging and speculation

79
Q

Does an equity indexed annuity transaction require the delivery of a prospectus?

A

No, these contracts are not considered securities by the SEC

80
Q

T/F: A RR may present variable annuity performance projections.

A

F; projecting variable annuity performance is prohibited

81
Q

T/F: Variable annuities are subject to registration requirements of the Act of 1933 and sold by prospectus.

A

T

82
Q

Prospectus drivers is required for all _________ insurance contracts.

A

Variable

83
Q

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?

A

To provide premium income on stable stock. Also note the premium provides a partial hedge against downside risk

84
Q

Describe the liability of the two partners in a limited partnership

A

General partners have unlimited liability, while limited partners have a limited liability

85
Q

If exercised against, the writer of an equity put option is obligated to ______ the underlying stock.

A

Buy

86
Q

Name three important factors for determining the premium of an equity option

A

The stock market price versus the strike price, time left until expiration, and volatility of the underlying security

87
Q

A mutual fund that focuses on a company’s year to year earnings momentum is considered a _______ fund.

A

Growth

88
Q

Describe whole life insurance.

A

A life insurance policy that has a fixed death benefit, fix premium payments, and builds cash value over time.

89
Q

When the term life policy expires and is renewed, will the premium be higher, lower, or stay the same?

A

Higher, since the insured is older and riskier to insure.

90
Q

Mae loans be taken against variable life policy?

A

Yes, for a portion of the contracts cash value

91
Q

Describe inflation, or purchasing power risk.

A

The risk that today’s investment will not be worth as much money is received in the future.

92
Q

Is a hedge fund investment considered liquid?

A

No

93
Q

T/F: deferred compensation plans are tax deductible.

A

False. Employee deferrals in Corporate contributions are not tax deductible until actually paid.

94
Q

When my American style options be exercise?

A

On any business day, up to the expiration date

95
Q

___________ is a form of life insurance that may be suitable for people with a fix time horizon

A

Term life

96
Q

Describe universal life insurance.

A

A permanent life insurance policy designed so the policy owner may adjust the death benefit in premium payments

97
Q

Jim is short 1 MNO August 40 put at 4.50. What is Jim’s breakeven point?

A

35.50

98
Q

A client has annuitize her contract under the street life option in soon dies. What is her death benefit?

A

Zero dollars. There is no death benefit post annuitization, since the contract is based on her life only.

99
Q

An investor writes 1 DEF May 55 call at 6. What is the breakeven point?

A

61

100
Q

T/off: when interest rates, go up, bond, prices, go up, and when interest rates, go down, bond prices, go down

A

False. There’s an inverse relationship between interest rates and prices.

101
Q

T/F: in a straight life annuity, payout option, no beneficiary will receive payments at the annuitant death.

A

True. All payments cease upon the annuitant death.

102
Q

A __________ plan has no contribution limit.

A

Non qualified

103
Q

T/F: income programs, purchase already producing Wells, but offer few intangible, drilling costs. I

A

True

104
Q

T/F: cash forwards can be for any amount of a commodity.

A

True. Cash for transactions are negotiated between a buyer and a seller and can be for any amount.

105
Q

__________ is suitable for a client who is willing to assume market risk

A

Variable life insurance

106
Q

Describe variable life insurance.

A

A life policy, where the death benefit varies, depending upon the performance of the investment options

107
Q

T/F: European options are considered derivatives because they may only be exercised at expiration

A

False. European options are considered derivatives because their value is derived from an underlying security.

108
Q

Is a person who invest in a variable annuity, more susceptible to legislative risk or investment risk?

A

Investment risk since the separate account of variable annuity fluctuates with the overall performance of the market

109
Q

T/F: investor cell coverage options in order to generate income

A

True. By selling the option, the sellers immediately credited with the premium.

110
Q

Money market securities have a maturity of _____________.

A

One year or less

111
Q

Identify the acronym: VLI

A

Variable life insurance

112
Q

Identify the position: An investor sells 1 ELG May 75 call at 6 and sells 1 ELG May 75 put at 6.

A

Astraddle, which is the purchase or sale of both a call and I put with the same stock, expiration, and strike price

113
Q

An annuity with growth dependent on the performance of securities in a separate account is called ____________ annuity.

A

Variable.

114
Q

Over development and high leverage of the risk associated with a _______ ___________ Program.

A

New construction

115
Q

T/F: to hedge of stock position, buying options, provides more protection than writing options.

A

True. When long stock investors may buy a put. When short stock, investors made buy a call.

116
Q

___________ drilling programs drill improve in areas.

A

Developmental

117
Q

T/off: an investor who has already annuitized a variable annuity, may roll it over into an IRA

A

False. Once annuitization begins, rollover is no longer permitted.

118
Q

In a nonqualified annuity, how was the payout taxed?

A

Only the earnings portion of subject to tax as ordinary income

119
Q

What is a covered call position?

A

The sale of a call against stock that is owned

120
Q

The ________ partner is in charge of management in decision making for the partnership.

A

General

121
Q

When calculating the POP for a mutual fund, the sales charge is added to the __________.

A

NAV

122
Q

Do long-term bonds, have higher or lower interest-rate risk?

A

Higher

123
Q

The money invested in a variable annuity is used to buy ________ _________.

A

Accumulation units (similar to mutual fund shares)

124
Q

Traditional contract assets are placed in the insurance company’s __________ account.

A

General

125
Q

Which contract trade on centralize exchanges, futures or forwards?

A

Futures

126
Q

Identify the risk of existing bond prices declining well interest rates are rising.

A

Interest-rate risk

127
Q

T/F: on average, variable annuities, have lower fees, and expenses than mutual funds.

A

F

128
Q

Gold, silver, platinum, and palladium are considered ___________.

A

Precious metals

129
Q

Copper, lead, tin, and zinc are considered ______________.

A

Non precious metals

130
Q

With options, what terms are synonymous with seller?

A

Writer, short

131
Q

T/S: buying call options is a leverage position.

A

True. Buying options allows you to pay a little to have control of a larger position

132
Q

Which type of annuity is considered a security, fixed or variable?

A

Variable

133
Q

What is the dollar limit that may be contributed annually to a nonqualified annuity?

A

There is no contribution limit

134
Q

T/S: close, and fun chairs are valued at their NAV at the close of the market each day

A

Foss. Close and Scherzer price intraday. They trade constantly at a price that may be discounted or premium to NAV.

135
Q

What is the primary benefit of including insurance in a financial plan?

A

To transfer to an insurance company, the risk of losing a persons wages due to death

136
Q

What payout option requires the insurance company to provide payments for as long as one of two people remain alive?

A

Joint and last Survivor

137
Q

Sandra buys 1 ABC Dec 70 call at 4. What is Sandra’s strategy?

A

Bullish

138
Q

What is the 1035 exchange?

A

Attacks free exchange of one annuity for another. These exchanges are allowed under section 1035 of the tax code.

139
Q

Who typically buys hedge funds?

A

Accredited or sophisticated investors through regulation D offerings

140
Q

Which of the following is not a security: an equity, indexed annuity, variable life policy, bank stock, or swap contract?

A

Equity indexed annuities are a type of fixed annuity and are therefore not securities

141
Q

A variable annuity is most suitable for a client who is seeking _________ __________
Over a long period.

A

Seeking capital appreciation

142
Q

T/F: an investor may lose money when investing in an equity indexed annuity.

A

False. Equity indexed annuities have a guaranteed minimum rate of return.

143
Q

Our life insurance death benefits taxable?

A

No. Death benefits are receive tax free.

144
Q

And investor wants to invest in bonds so she can buy a car in two years. What is an appropriate recommendation?

A

Buying bonds with less than two years to maturity would be best. Money market securities would also be suitable.

145
Q

At Annuitization, what will determine the annuitant payment?

A

Affix number of annuity units with a fluctuating value per unit

146
Q

What happens when an investor is passive losses exceed her passive income?

A

She is able to carry forward the passive losses

147
Q

All variable contract premiums are placed in the insurance company’s _________ account. 

A

Separate

148
Q

Can a variable life policy’s death benefit grow over time?

A

Yes. If the account performance is positive, the benefit will increase.

149
Q

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?

A

$600 gain on the premium

150
Q

What does a limited partnership subscription agreement state in regard to a purchaser?

A

He is aware of risks, can meet suitability standards, has red disclosure documents, and knows the required investment.

151
Q

Is performance in a given period is below the AIR, the next payment will _____________.

A

Decrease

S 66 (12 decks)

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