ETFs, MFs, Variable Annuities, and Hedge Funds

Question 1

ETF Qualities

Answer 1

Exchange-Traded Funds trade in the secondary market (NYSE), are marginable, have a lower cost structure, and are more tax efficient (no managers buying/selling individual securities)

Question 2

UIT Qualities

Answer 2

Unit Investment Trusts are professionally selected and passively managed

Question 3

What are the different types of Mutual Funds?

Answer 3

Equity, Fixed Income, Money Market, and Interval

Question 4

What is the difference between Open-End and Closed-End Funds?

Answer 4

Open End Funds continuously issue new shares to the public, while Closed-End Funds only offer new shares one time at opening, then issue based on supply and demand

Question 5

Open-End Funds NAV is calculated…

Answer 5

At least once per business day (always do business based on the next calculation of the NAV)

Question 6

Public Offering Price (POP)

Answer 6

NAV + Sales Charge

Question 7

In an Open-End Fund, the largest single expense is the…

Answer 7

Investment Advisor

Question 8

12b-1 Fee

Answer 8

Promotional expenses for marketing that the issuing fund pays.

Question 9

In an Open-End Fund, the largest single expense to the customer is the…

Answer 9

Load

Question 10

For Closed-End Funds, what is a Breakpoint?

Answer 10

Quantity discount

Question 11

What is a Breakpoint Sale?

Answer 11

When you avoid the breakpoint to maximize your commission

Question 12

LOI

Answer 12

Letter of Intent that allows you to opt into a Closed-End Fund on a conditional basis - follows 13/90 rule: good for 13 months, can be backdated for 90 days

Question 13

True or False: Investment Clubs are eligible for breakpoints

Answer 13

False

Question 14

DCA

Answer 14

Dollar-Cost Average: Fixed dollars that are invested regularly (usually in regular intervals). DCA lowers average cost than those of underlying shares, but does not guarantee a profit

Question 15

Sales Charge RE POP

Answer 15

NAV / (100% - Sales Charge) = POP
POP is always > NAV

Question 16

Subchapter M / Conduit Pipeline Theory / DIE 90

Answer 16

IRS states that as long as the MF passes through 90% of net investment income, they will wait and receive it from the MF shareholders

Question 17

Disadvantage of Mutual Funds

Answer 17

Give up tax control of your investments - you do not decide when to sell individual securities (funds will rebalance per their discretion)

Question 18

Maximum Sales Charge is…

Answer 18

8.5%

Question 19

Maximum 12b-1 Fee is…

Answer 19

0.25% (cannot be more than 0.75%)

Question 20

Maximum Expensary Fee to the fund is…

Answer 20

Investment Advisory Fee

Question 21

Variable (Life) Annuity

Answer 21

A Mutual Fund with an insurance wrapper - non-qualified retirement plan that uses after-tax money

Question 22

When do you have to start taking distributions from a Variable Annuity?

Answer 22

59.5yo

Question 23

If you take distributions from Variable Annuities before 59.5yo, you will…

Answer 23

Owe 10% penalty

Question 24

Contributions into a Variable Annuity frow…

Answer 24

Tax-Deferred

Question 25

Accumulation Units

Answer 25

Treated like shares of stock in a Variable Annuity. Accumulation units are measured daily within a Separate Account (like how shares are measured daily in a Mutual Fund)

Question 26

Separate Account

Answer 26

Treated like a Mutual Fund

Question 27

Fixed Annuity risk is assumed by the…

Answer 27

Insurance Company

Question 28

Variable Annuity risk is assumed by the…

Answer 28

Annuitant (holder)

Question 29

Annuitization

Answer 29

Treated like withdrawals from the separate account

Question 30

When annuitizing, Accumulation Units turn into…

Answer 30

Annuity Units

Question 31

Instead of Annuitizing, you may…

Answer 31

Take a lump sum or random withdrawal

Question 32

Withdrawals from a Variable Annuity are taxed at…

Answer 32

Ordinary income tax rates

Question 33

A Random Withdrawal from a Variable Annuity are always taken…

Answer 33

Last-In-First-Out (LIFO)

Question 34

Which Annuiziation election yields the largest monthly check?

Answer 34

Life Only

Question 35

Assumed Interest Rate (AIR)

Answer 35

Payouts will vary based on the AIR (like how payout yields will change based on interest rates).
If Annuity Unit > AIR, then check goes up. If Annuity Unit = AIR, then check stays flat. If Annuity Unit < AIR, then check goes down

Question 36

Exclusion Ratio of a Variable Annuity is…

Answer 36

20% (20% tax has already been paid for - you still owe taxes on 80% of the check)

Question 37

REIT

Answer 37

Real Estate Investment Trust - Same as a Mutual Fund except for Real Estate (follows the DIE 90 - 90% passthrough of Net Investment Income , NOT LOSSES)

Question 38

DPP: GP vs LP

Answer 38

Direct Participation Programs: General Partner vs Limited Partner (Partnerships)
General Partner assumes the liability, Limited Partner provides the funds

Question 39

Within a DPP, there is no admission emission without permission from the…

Answer 39

General Partner

Question 40

True or False: Partnerships are liquid.

Answer 40

False

Question 41

Within a Partnership, passthrough is conducted with…

Answer 41

Both Net Income and Losses

Question 42

What are the different types of DPPs?

Answer 42

Real Estate, Oil and Gas, Small-Cap Debt and Equity, Business Development Comopanies (BDCs), Equipment Leasing

Question 43

True or False: Exploratory DPPs are the riskiest out of all DPPs

Answer 43

True

Question 44

DPPs are offered…

Answer 44

Both in private placement and public offerings

Question 45

What is the point of constructing an Alternative Investment (Hedge Fund / Private Equity Fund / VC Fund)?

Answer 45

To be exempt from registration under the Investment Company Act of 1940

Question 46

True or False: Alternative Investments are liquid

Answer 46

False

Question 47

Charges and Expenses of Alternative Investments…

Answer 47

2% of AUM and 20% of profits