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Series 66 > Ch 11 Investment Vehicles > Flashcards

Ch 11 Investment Vehicles Flashcards

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Series 66 flashcards
1
Q

True or False: 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

Who assumes the investment risk in a variable insurance contract?

A

The client

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3
Q

An investor writes 1 DEF May 55 Call at 6. What is the investor’s strategy?

A

Bearish

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4
Q

Which annuity payout option provides for the greatest monthly payment?

A

Straight-life

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5
Q

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

A

Interest rate risk

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6
Q

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

A

Volatility

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7
Q

Describe inflation or purchasing power risk.

A

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

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8
Q

May hedge funds sell stocks short and use margin?

A

Yes

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9
Q

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

A

sell

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10
Q

A _____________ plan has no contribution limit.

A

non-qualified

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11
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

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12
Q

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

A

non-precious metals.

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13
Q

An investor buys a March corn contract at $6.00. If the contract is later closed out at $6.05, what is the profit/loss?

A

$250 ($.05 x 5,000).

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14
Q

Identify the acronym: TSA

A

Tax-Sheltered Annuity (a qualified contract)

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15
Q

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

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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16
Q

True or False: Cash forwards can be for any amount of a commodity.

A

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

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17
Q

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

A

general account.

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18
Q

To invest in a limited partnership, an investor must complete the _____________ __________.

A

Subscription Agreement.

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19
Q

What is not considered a derivative?

A

Mutual funds, stocks, bonds, and notes

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20
Q

True or False: Limited partners are taxed when they receive a distribution from the partnership.

A

False. 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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21
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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22
Q

Bill shorts July soybeans at $15.00. 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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23
Q

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

A

Higher

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24
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.

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25
Q

A put option gives the owner the right to ______.

A

sell.

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26
Q

The money invested in a variable annuity is used to buy _____________ _____.

A

accumulation units (similar to mutual fund shares).

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27
Q

An 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.

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28
Q

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

A

annuity units.

29
Q

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

A

80 - 5 = 75 (strike price minus premium or PUT DOWN)

30
Q

True or False: LEAPS and interest rate swaps are derivatives.

A

True. Both LEAPS and swaps are derivatives.

31
Q

Define duration.

A

The measure, expressed in years, of a bond’s price sensitivity to interest rate changes

32
Q

Identify the acronym: AIR

A

Assumed Interest Rate

33
Q

True or False: An investor may lose money when investing in an equity-indexed annuity.

A

False. Equity-index annuities have a guaranteed minimum rate of return.

34
Q

What are the two main uses of futures?

A

The two main uses are hedging and speculation.

35
Q

Identify the acronym: EIA

A

Equity-Indexed Annuity (also known as an Equity-Indexed Contract or EIC)

36
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

A $600 gain on the premium

37
Q

True or False: A registered representative (RR) may present variable annuity performance projections.

A

False. Projecting variable annuity performance is prohibited.

38
Q

True or False: Investors sell covered options in order to generate income.

A

True. By selling the option, the seller is immediately credited with the premium.

39
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)

40
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.

41
Q

True or False: The market price of closed-end shares could be higher, lower, or equal to the NAV.

A

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

42
Q

Define futures contract.

A

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

43
Q

True or False: Variable annuities are subject to registration requirements of the Act of 1933 and sold by prospectus.

A

True

44
Q

Who assumes the investment risk in a traditional insurance contract?

A

The insurance company

45
Q

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

A

55 + 6 = 61 (strike price + premium or CALL UP)

46
Q

True or False: Income Programs purchase already producing wells, but offer few intangible drilling costs.

A

True

47
Q

Define insured.

A

The person whose life is covered by an insurance contract

48
Q

True or False: An investor who has already annuitized a variable annuity may roll it over into an IRA.

A

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

49
Q

Which interest rates are generally more volatile?

A

Short-term rates

50
Q

True or False: Closed-end fund shares are valued at their NAV at the close of the market each day.

A

False. Closed-end shares are priced intraday. They trade constantly at a prices that may be discounts or premiums to NAV.

51
Q

An investor holds 1 XYZ January 80 Put at 5. What is her strategy?

A

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

52
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

53
Q

Does a term life policy have cash value?

A

No. Term life is pure insurance.

54
Q

What is a fund of funds?

A

A mutual fund that invests in other multiple hedge funds

55
Q

The ________________ the duration, the greater the bond’s price sensitivity.

A

longer/greater

56
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.

57
Q

What is a 1035 Exchange?

A

A tax-free exchange of one annuity for another.

These exchanges are allowed under Section 1035 of the Tax Code.

58
Q

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

A

No, these contracts are not considered securities by the SEC.

59
Q

True or False: To hedge a stock position, buying options provides more protection than writing options.

A

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

60
Q

If a client’s goal is preservation of principal, what fund would be most appropriate?

A

Money-market fund

61
Q

Describe whole life insurance.

A

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

62
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 person’s wages due to death

63
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

64
Q

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

A

Exploratory (wildcatting)

65
Q

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

A

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

66
Q

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

A

Futures contracts are easier to offset; forwards are generally non-transferrable.

67
Q

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

A

She is taxed on the earnings at her ordinary income rate.

68
Q

Which contracts trade on centralized exchanges—futures or forwards?

A

Futures

Series 66 (21 decks)

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