Ch 11 Investment Vehicles Flashcards
True or False: A Section 3(c)(7) hedge fund may contain performance-based fees.
True. However, investors should understand the fee structure of a hedge fund.
Who assumes the investment risk in a variable insurance contract?
The client
An investor writes 1 DEF May 55 Call at 6. What is the investor’s strategy?
Bearish
Which annuity payout option provides for the greatest monthly payment?
Straight-life
Identify the risk of existing bond prices declining while interest rates are rising.
Interest rate risk
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?
Volatility
Describe inflation or purchasing power risk.
The risk that today’s investment will not be worth as much when the money is received in the future.
May hedge funds sell stocks short and use margin?
Yes
If exercised against, the writer of an equity call option is obligated to _____ the underlying stock.
sell
A _____________ plan has no contribution limit.
non-qualified
What is a derivative?
A financial product that derives its value from the value of underlying assets such as stocks, bonds, or mortgages
Copper, lead, tin, and zinc are considered ___________________.
non-precious metals.
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?
$250 ($.05 x 5,000).
Identify the acronym: TSA
Tax-Sheltered Annuity (a qualified contract)
Identify the position: An investor sells 1 ELG May 75 call at 6 and sells 1 ELG May 75 put at 6
A straddle, which is the purchase or sale of both a call and a put with the same stock, expiration, and strike price
True or False: Cash forwards can be for any amount of a commodity.
True. Cash forward transactions are negotiated between a buyer and seller and can be for any amount.
Traditional contract assets are placed in the insurance company’s __________ account.
general account.
To invest in a limited partnership, an investor must complete the _____________ __________.
Subscription Agreement.
What is not considered a derivative?
Mutual funds, stocks, bonds, and notes
True or False: Limited partners are taxed when they receive a distribution from the partnership.
False. Partners are taxed in the year in which the income is reported, not in the year in which it is received.
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.
Bill shorts July soybeans at $15.00. 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).
Do long-term bonds have higher or lower interest-rate risk?
Higher
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 put option gives the owner the right to ______.
sell.
The money invested in a variable annuity is used to buy _____________ _____.
accumulation units (similar to mutual fund shares).
An 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 (payout), accumulation units are exchanged for __________ units.
annuity units.
An investor holds 1 XYZ January 80 Put at 5. What is her breakeven point?
80 - 5 = 75 (strike price minus premium or PUT DOWN)
True or False: LEAPS and interest rate swaps are derivatives.
True. Both LEAPS and swaps are derivatives.
Define duration.
The measure, expressed in years, of a bond’s price sensitivity to interest rate changes
Identify the acronym: AIR
Assumed Interest Rate
True or False: An investor may lose money when investing in an equity-indexed annuity.
False. Equity-index annuities have a guaranteed minimum rate of return.
What are the two main uses of futures?
The two main uses are hedging and speculation.
Identify the acronym: EIA
Equity-Indexed Annuity (also known as an Equity-Indexed Contract or EIC)
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
True or False: A registered representative (RR) may present variable annuity performance projections.
False. Projecting variable annuity performance is prohibited.
True or False: Investors sell covered options in order to generate income.
True. By selling the option, the seller is immediately credited with the premium.
In a limited partnership, when is a limited partner taxed on any generated income?
In the year in which the income is reported (declared)
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.
True or False: The market price of closed-end shares could be higher, lower, or equal to the NAV.
True. Shares can trade at a premium or discount to NAV based on supply and demand forces.
Define futures contract.
An agreement to buy or sell a specific amount of a commodity on a stipulated date in the future
True or False: Variable annuities are subject to registration requirements of the Act of 1933 and sold by prospectus.
True
Who assumes the investment risk in a traditional insurance contract?
The insurance company
An investor writes 1 DEF May 55 Call at 6. What is the breakeven point?
55 + 6 = 61 (strike price + premium or CALL UP)
True or False: Income Programs purchase already producing wells, but offer few intangible drilling costs.
True
Define insured.
The person whose life is covered by an insurance contract
True or False: An investor who has already annuitized a variable annuity may roll it over into an IRA.
False. Once annuitization begins, a rollover is no longer permitted.
Which interest rates are generally more volatile?
Short-term rates
True or False: Closed-end fund shares are valued at their NAV at the close of the market each day.
False. Closed-end shares are priced intraday. They trade constantly at a prices that may be discounts or premiums to NAV.
An investor holds 1 XYZ January 80 Put at 5. What is her strategy?
Bearish (to find strategy for put buyers, use the phrase PUT DOWN)
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
Does a term life policy have cash value?
No. Term life is pure insurance.
What is a fund of funds?
A mutual fund that invests in other multiple hedge funds
The ________________ the duration, the greater the bond’s price sensitivity.
longer/greater
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 is a 1035 Exchange?
A tax-free exchange of one annuity for another.
These exchanges are allowed under Section 1035 of the Tax Code.
Does an equity-indexed annuity transaction require the delivery of a prospectus?
No, these contracts are not considered securities by the SEC.
True or False: To hedge a stock position, buying options provides more protection than writing options.
True. When long stock, investors may buy a put. When short stock, investors may buy a call.
If a client’s goal is preservation of principal, what fund would be most appropriate?
Money-market fund
Describe whole life insurance.
A life insurance policy that has a fixed death benefit, fixed premium payments, and builds cash value over time
What is the primary benefit of including insurance in a financial plan?
To transfer to an insurance company the risk of losing a person’s 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
What type of oil and gas program drills for new oil reserves in unproven areas?
Exploratory (wildcatting)
Is a person who invests in a variable annuity more susceptible to legislative risk or investment risk?
Investment risk, since the separate account of a variable annuity fluctuates with the overall performance of the market
What is easier to offset, a futures contract or a cash forward?
Futures contracts are easier to offset; forwards are generally non-transferrable.
A 62-year-old investor makes a full withdrawal from her non-qualified fixed annuity. What is the tax consequence?
She is taxed on the earnings at her ordinary income rate.
Which contracts trade on centralized exchanges—futures or forwards?
Futures
