Chapter 5

Question 1

What 2 types of securities would not be derivatives?

Answer 1

REITS and Investment companies (closed-end, open-end, and UIT’s)

Question 2

For futures contracts, what would a long hedge and short hedge be used to protect against?

Answer 2

A long hedge would be used to protect against rising prices and a short hedge would be used to protect against falling prices.

Question 3

What is it called when you establish a position on the opposite side of the market you are already on to protect your position?

Answer 3

Hedging

Question 4

For investment companies, how is diversification achieved?

Answer 4

Either within a certain sector or across global markets with foreign securities.

Question 5

For closed-end investment companies, how is the market price determined?

Answer 5

It’s based on market demand and is often unrelated to the investment company’s NAV.

Question 6

What is the greatest risk of investing in a limited partnership?

Answer 6

Lack of liquidity. Most LP’s aren’t publicly traded and transfer of ownership requires approval of the GP.

Question 7

What are the main features of whole life insurance?

Answer 7

Fixed death benefit, cash value, and level premium payment. Premiums payments are invested by the company into a general account. Policy holders do not choose investments.

Question 8

What are the main features of universal life insurance?

Answer 8

Adjustable death benefit, flexible premium payments, policyholders do not choose investments.

Question 9

What are the main features of variable life insurance?

Answer 9

They are very similar to whole life insurance. The main difference is that the policyholder bears the investment risk of the policy. VUL’s are under federal law and are subject to the rules of the SEC.

Question 10

What is capital need analysis?

Answer 10

To determine of an individual has enough life insurance to fund their future financial goals.

Question 11

What is the result of multiplying the total number of shares outstanding by the market value per share of a common stock?

Answer 11

Market capitalization is the current total dollar value of all of the shares of outstanding stock. It is calculated as the question states by multiplying the current value of one share of stock times the total number of shares outstanding.

Question 12

Would an interest rate swap be considered a derivative?

Answer 12

Yes.

Question 13

Which of the following life insurance policies is considered to be a “security” under federal securities laws?

Answer 13

Variable Life because that is the only policy that carries “investment risk”.