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Series 66 > Investment Vehicles > Flashcards

Investment Vehicles Flashcards

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Series 66 flashcards
1
Q

True or False: When interest rates go up, bonds prices go up, and when interest rates go down, bond prices go down.

A

False. There is an inverse relationship between interest rates and prices.

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2
Q

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

A

Given a yield change, long-term bonds move more in price (lower coupon or longer duration are also correct.)

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3
Q

Which interest rates are generally more volatile?

A

Short-term rates

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4
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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5
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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6
Q

Is a CMO considered a derivative?

A

Yes

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7
Q

Money-market securities have a maturity of __________________.

A

Money-market securities have a maturity of one year or less.

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8
Q

Name some of the different types of money-market instruments. 4

A
  1. T-Bills,
  2. Bankers’ Acceptances (BAs),
  3. Commercial Paper,
  4. Negotiable CDs
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9
Q

With options, what terms are synonymous with buyer? 3

A
  1. Owner,
  2. holder,
  3. long
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10
Q

A call option gives the owner the right to _____.

A

A call option gives the owner the right to buy.

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11
Q

With options, what terms are synonymous with seller?

A

Writer, short

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12
Q

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

A

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

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13
Q

A put option gives the owner the right to ______.

A

A put option gives the owner the right to sell.

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14
Q

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

A

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

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15
Q

True or False: Options are derivatives since their value is based on the changing value of an underlying instrument.

A

True

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16
Q

Name three important factors for determining the premium of an equity option. 3

A
  1. The stock’s market price versus the strike price,
  2. time left until expiration, and
  3. volatility of the underlying security
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17
Q

Calls and puts are the two ________ of options.

A

Calls and puts are the two types of options.

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18
Q

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

A

Bearish

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19
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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20
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.

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21
Q

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

A

Money-market fund

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22
Q

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

A

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

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23
Q

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

A

Variable

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24
Q

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

A

True

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25
Q

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

A

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

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26
Q

At annuitization (payout), what will determine the annuitant’s payment?

A

A fixed number of annuity units with a fluctuating value per unit

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27
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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28
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

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29
Q

Describe the liability of the two partners in a limited partnership.

A

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

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30
Q

The _________ partner is in charge of management and decision-making for the partnership.

A

The general partner is in charge of management and decision-making for the partnership.

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31
Q

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

A

Exploratory (wildcatting)

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32
Q

________________ Drilling Programs drill in proven areas.

A

Developmental Drilling Programs drill in proven areas.

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33
Q

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

A

True

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34
Q

True or False: Passive income is income derived from dividends and interest generated by securities in a portfolio.

A

False. Passive income is derived from an investment in a direct participation program (e.g., limited partnership).

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35
Q

What happens when an investor’s passive losses exceed her passive income?

A

She is able to carry forward the passive losses.

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36
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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37
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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38
Q

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

A

Stability

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39
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.

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40
Q

What is a covered call position?

A

The sale of a call (obligation to sell) against stock that is owned

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41
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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42
Q

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

A

The longer/greater the duration, the greater the bond’s price sensitivity.

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43
Q

Define duration.

A

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

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44
Q

What is the breakeven point? Sell 1 RFQ Feb 25 Call at 2.90

A

The breakeven point is strike price + premium = 27.90

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45
Q

What is the breakeven point? Buy 100 shares of XYZ at 47 and Write 1 XYZ July 50 Call at 9.00

A

The breakeven point is cost of the stock - premium = 38.00

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46
Q

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

A

Higher

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47
Q

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

A

Interest rate risk

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48
Q

Is a hedge fund investment considered liquid?

A

No

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49
Q

May hedge funds sell stocks short and use margin?

A

Yes

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50
Q

What is the dollar limit that may be contributed annually to a non-qualified annuity?

A

There is no contribution limit.

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51
Q

True or False: The AIR is a guaranteed minimum rate of return.

A

False. The AIR is a benchmark rate that is not guaranteed.

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52
Q

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

A

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

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53
Q

If performance in a given period is below the AIR, the next payment will ___________.

A

If performance in a given period is below the AIR, the next payment will decrease.

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54
Q

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

A

If performance in a given period equals the AIR, the next payment will remain constant.

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55
Q

True or False: Performance must be negative for a variable annuity’s payment to fall.

A

False. Performance below the AIR will cause the payment to fall, even if the investment result was positive.

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56
Q

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

A

A 1035 Exchange

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57
Q

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

A

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

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58
Q

Prospectus delivery is required for all ___________ insurance contracts.

A

Prospectus delivery is required for all variable insurance contracts.

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59
Q

Who assumes the investment risk in a variable insurance contract?

A

The client

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60
Q

May loans be taken against variable life policies?

A

Yes, for a portion of the contract’s cash value (often 85%)

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61
Q

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

A

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

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62
Q

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

A

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

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63
Q

True or False: In a straight-life annuity payout option, no beneficiary will receive payments at the annuitant’s death.

A

True. All payments cease upon the annuitant’s death.

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64
Q

Which annuity payout option provides for the greatest monthly payment?

A

Straight-life

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65
Q

A client has annuitized her contract under the straight-life option and soon dies. What is her death benefit?

A

$0. There is no death benefit post-annuitization, since the contract is based on her life only.

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66
Q

Identify the acronym: AIR

A

Assumed Interest Rate

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67
Q

Identify the acronym: VLI

A

Variable Life Insurance

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68
Q

Identify the acronym: EIA

A

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

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69
Q

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

A

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

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70
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.

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71
Q

Define insured.

A

The person whose life is covered by an insurance contract

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72
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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73
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

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74
Q

Describe universal life insurance.

A

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

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75
Q

Describe variable life insurance.

A

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

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76
Q

Define futures contract.

A

An agreement to buy or sell a specific amount of a commodity, or a financial instrument at an agreed upon price on a stipulated date in the future.

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77
Q

True or False: Forward contracts are exchange traded.

A

False. Futures, not forwards, trade on the exchanges.

78
Q

What are the two main uses of futures?

A

The two main uses are hedging and speculation.

79
Q

List some of the characteristics of hedge funds. 3

A

Hedge funds are often

  1. leveraged,
  2. unregistered, and
  3. illiquid.
80
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

81
Q

True or False: Contribution limits and employment requirements apply to both qualified and non-qualified plans.

A

False. Contribution limits and employment requirements apply to qualified plans only.

82
Q

A _____________ plan has no contribution limit.

A

A non-qualified plan has no contribution limit.

83
Q

Give some examples of financial derivatives. 7

A
  1. Rights,
  2. warrants,
  3. swaps,
  4. forwards,
  5. options, and
  6. structured notes or
  7. exchange-traded notes
84
Q

What is not considered a derivative? 4

A
  1. Mutual funds,
  2. stocks,
  3. bonds, and
  4. notes
85
Q

________ life insurance is suitable for a client who is willing to assume market risk.

A

Variable life insurance is suitable for a client who is willing to assume market risk.

86
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.

87
Q

True or False: Deferred compensation plans are tax-deductible.

A

False. Employee deferrals and corporate contributions are not tax-deductible until actually paid.

88
Q

Define leveraged investing.

A

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

89
Q

True or False: On average, variable annuities have lower fees and expenses than mutual funds.

A

False

90
Q

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

A

A hedge fund

91
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.

92
Q

True or False: Investors may buy options in an effort to hedge stock positions.

A

True

93
Q

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

A

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

94
Q

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

A

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

95
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

96
Q

True or False: Buying call options is a leveraged position.

A

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

97
Q

Which contracts trade on centralized exchanges—futures or forwards?

A

Futures

98
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.

99
Q

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

A

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

100
Q

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

A

False. Projecting variable annuity performance is prohibited.

101
Q

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

A

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

102
Q

Who assumes the investment risk in a traditional insurance contract?

A

The insurance company

103
Q

Identify the acronym: TSA

A

Tax-Sheltered Annuity (a qualified contract)

104
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

105
Q

Are life insurance death benefits taxable?

A

No. Death benefits are received tax-free.

106
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).

107
Q

Does a term life policy have cash value?

A

No. Term life is pure insurance.

108
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

109
Q

__________ is a form of life insurance that may be suitable for people with a fixed time horizon.

A

Term life is a form of life insurance that may be suitable for people with a fixed time horizon.

110
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.

111
Q

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

A

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

112
Q

True or False: 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.

113
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

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

114
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).

115
Q

When a 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.

116
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.

117
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.

118
Q

When may American-Style options be exercised?

A

On any business day up to the expiration date

119
Q

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

A

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

120
Q

True or False: Forward contracts are standardized.

A

False. Futures, not forwards, are standardized by a futures exchange.

121
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.

122
Q

Sandra buys 1 ABC December 70 Call at 4. What is Sandra’s strategy?

A

Bullish (to find the strategy for call buyers, use the phrase CALL UP)

123
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

124
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)

125
Q

In a non-qualified annuity, how is the payout taxed?

A

Only the earnings portion is subject to tax as ordinary income

126
Q

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

A

To invest in a limited partnership, an investor must complete the Subscription Agreement.

127
Q

What does a limited partnership’s Subscription Agreement state in regard to a purchaser?

A

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

128
Q

Over-development and high leverage are the risks associated with a ____ _____________ Program.

A

Over-development and high leverage are the risks associated with a New Construction Program.

129
Q

Exploratory drilling is also referred to as _______________.

A

Exploratory drilling is also referred to as Wildcatting.

130
Q

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

A

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

131
Q

True or False: Covered call writing is a conservative option strategy that is designed to generate income.

A

True

132
Q

An investor buys 100 shares of RST at 30 and sells 1 RST October 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.

133
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.

134
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.

135
Q

Sandra buys 1 ABC December 70 Call at 4. What is Sandra’s breakeven point?

A

70 + 4 = 74 (strike price + premium or CALL UP)

136
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)

137
Q

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

A

40 - 4.50 = 35.50 (strike price minus the premium or PUT DOWN)

138
Q

What are the characteristics of a hedge fund of funds? 5

A
  • The parent company may be registered with the SEC as an investment company.
  • The parent company then invest in one or more unregistered private hedge funds.
  • Have lower minimum investment requirements
  • May be advertised publicly
  • larger number of potential investors than traditional hedge funds.
139
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.

140
Q

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

A

True. Both LEAPS and swaps are derivatives.

141
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.

142
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.

143
Q

True or False: An investor may roll a non-qualified annuity into an IRA without being taxed.

A

False. Withdrawing from a non-qualified annuity is taxable. A 1035 exchange does not apply to non-qualified plans.

144
Q

A variable annuity is most suitable for a client who is seeking ________ ____________ over a long period.

A

A variable annuity would be most suitable for a client who is seeking capital appreciation over a long period.

145
Q

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

A

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

146
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.

147
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)

148
Q

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

A

The money invested in a variable annuity is used to buy accumulation units (similar to mutual fund shares).

149
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.

150
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.

151
Q

Who typically buys hedge funds?

A

Accredited (sophisticated) investors through Regulation D offerings

152
Q

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

A

Gold, silver, platinum, and palladium are considered precious metals.

153
Q

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

A

Copper, lead, tin, and zinc are considered non-precious metals.

154
Q

If the owner of a variable annuity dies during the accumulation phase the beneficiary will receive what? (if there is a death benefit attached)

A

The greater of either

  1. The sum of all the contract owner’s net payments into the annuity, or
  2. The value of the annuity on the day the owner dies.
155
Q

What factors are taken into consideration when the company calculates a variable annuity’s annuitant’s first payment? 5

A
  1. The number of accumulation units
  2. Annuitant’s age and gender
  3. Settlement (payout) option selected
  4. Life expectancy
  5. Assumed Interest Rate (AIR)
156
Q

What type of annuity is a hybrid product that combines elements of both fixed and variable annuities?

A

Equity-Indexed Annuities

157
Q

What features related to equity-indexed annuities greatly influence the investor’s ultimate returns? 3

A
  1. Participation Rate
  2. Cap Rate
  3. Indexing Method
158
Q

For an EIA, what is the participation rate?

A

A %, 80% for instance, that the annuity is credited with of the index’s gain. (Index returns 10% so annuity investor returns 80% of 10%, 8%).

159
Q

For an EIA, what is the cap rate?

A

A maximum % return of an annuity. So if the cap rate is 8% then the index, no matter if it earned 8% or 50%, the investor will only earn 8%.

160
Q

For an EIA, what is the indexing method

A

The different methods companies may use for calculating changes in the index to the which the annuity is linked.

161
Q

What may an EIA use either in place of or in addition to a participation rate?

A

A spread, margin, or asset fee. It is a specified % that is subtracted from the gains achieved by the index.

162
Q

What are four popular indexing methods for EIAs?

A
  1. Annual Reset (Rachet)
  2. High-Water Mark
  3. Point-to-Point
  4. Index Averaging
163
Q

What is the annual reset (ratchet) indexing method for EIAs?

A

Calculates the contract’s return based on the amount the relevant index has increased from the beginning of the year to the end.
Advantage - The investor’s gains are locked in every year and decreases are ignored

164
Q

What is the high-water mark indexing method for EIAs?

A

Examines how the index has performed at various points during the life of the contract and uses the three highest values to calculate the annuity’s rate of return. May result in higher returns for investors while also giving them some protection against declines.

165
Q

What is the point-to-point indexing method for EIAs?

A

Compares the index’s value on two particular dates, such as the date on which the contract began and the date on which it ended.
Advantage - It may be combined with higher caps or participation rates to increase the contract’s return.
Disadvantage - The returns are based on how the index is performing as of a particular date, which may reduce the returns if the market is in a decline.

166
Q

What is the index averaging indexing method for EIAs?

A

Calculates the index’s average value on a daily or monthly basis. This method may limit the contract’s returns.

167
Q

The majority of EIAs do not include _________ in their return calculations.

A

The majority of EIAs do not include dividends in their return calculations.

168
Q

Some bonds, referred to as _______ bonds, will pay their entire principal amount at once. On the other hand, if the bonds return their principal over a series of years, they are categorized as ________ bonds.

A

Some bonds, referred to as term bonds, will pay their entire principal amount at once. On the other hand, if the bonds return their principal over a series of years, they are categorized as serial bonds.

169
Q

What are the four investment grade ratings of bonds put out by S&P from highest quality to lowest quality?

A
  1. AAA
  2. AA
  3. A
  4. BBB
170
Q

What are the four investment grade ratings of bonds put out by Moody’s from highest quality to lowest quality?

A
  1. Aaa
  2. Aa
  3. A
  4. Baa
171
Q

What is the purpose of bond laddering?

A

To reduce the impact on the portfolio to changes in interest rates. It also lowers reinvestment risk since the investor is reinvesting each year as a bond matures compared to waiting for all the bonds to mature.

172
Q

What is a barbell strategy and why is it used?

A
  • The investor buys bonds at the two ends of the yield curve.
  • It seeks to capture the highest coupon payment on the long-term bonds but also retains the ability to reinvest quickly when the short-term bonds mature. If the investor anticipates a shift in the interest rates, only a portion of the portfolio will need to be changed.
173
Q

What are some examples of alternative investments? 5

A
  1. Real Estate
  2. Derivatives
  3. Hedge Funds
  4. Limited Partnerships
  5. Commodities
174
Q

What is a hedge fund?

A

A private investment pool that is not required to register with the SEC under the Investment Company Act of 1940.

175
Q

What are some of the disadvantages and risks commonly associated with hedge funds? 5

A
  1. Illiquid Investments
  2. Increased Risk/Return
  3. Less Transparency
  4. Tax Considerations
  5. Higher Fees
176
Q

What are some of the risks/concerns associated with limited partnerships? 8

A
  1. Management ability and track record of the general partners
  2. Illiquid nature of the partnership units
  3. Possible loss of capital
  4. Unpredictability of income
  5. Delay in reaching the crossover point - the date on which the program’s revenue exceed expenses (i.e. producing profits for partners)
  6. Ability of the limited partner to pay future assessments
  7. Rising operating costs
  8. Changes in the laws or governmental regulations (regulatory and legislative risk)
177
Q

What types of business are limited partnerships commonly formed to operate as? 5

A
  1. Oil and gas programs
  2. Real estate partnerships
  3. Commodity pools
  4. Hedge funds
  5. Equipment leasing programs
178
Q

List three types of oil and gas limited partnerships in order from those with the highest tax deductions to the lowest tax deductions/

A
  1. Developmental Programs
  2. Exploratory Programs
  3. Income Programs
179
Q

NASAA recommends that investors meet one of the following financial criteria when investing in a real estate or oil and gas limited partnership: annual income of at least $__________ or a minimum net worth of $__________.

A

NASAA recommends that investors meet one of the following financial criteria when investing in a real estate or oil and gas limited partnership: annual income of at least $70,000 or a minimum net worth of $250,000.

180
Q

To be considered a REIT, what income test must be satisfied?

A

At least 75% of its gross income must be derived from real property.

181
Q

What are the three options exchanges?

A
  1. Chicago Board Options Exchange (CBOE)
  2. American Stock Exchange (AMEX)
  3. Philadelphia Stock Exchange (PHLX)
182
Q

Option premiums are determined by the marketplace and will fluctuate based on what factors? 5

A
  1. Relationship between the underlying security’s market price and the option’s strike price
  2. Time until expiration
  3. Volatility of the underlying security
  4. Dividends paid by the company that issued the underlying security
  5. Current interest rates
183
Q

Option contracts may be created for many kinds of securities. What are the four most common?

A
  1. Equity options
  2. Index options
  3. Yield-based options
  4. World currency options
184
Q

How is a futures contract different that an options contract?

A

In a futures contract the buyer may be forced to take delivery of the commodity, unlike in an options contract where the buyer may choose to let the contract expire worthless.

185
Q

What is a forward contract?

A

An agreement between a buyer and a seller for the future delivery of a commodity at a specified price, time, and place. Now frequently used to hedge interest rates (interest-rate swaps) and foreign currencies

186
Q

Three major differences between futures contracts and forward contracts is what?

A
  1. Forward contracts are not typically exchange-traded
  2. Forward contracts features are customized.
  3. In a forward contract, both the buyer and the seller must come to an agreement for either party to transfer the contract to a third party.
187
Q

Which terms of a futures contract are set by the exchanges?

A
  1. Contract size
  2. Point of delivery
  3. Delivery month
  4. Grade of the underlying security or commodity
188
Q

In order to be viable, a futures contract must have what two characteristics?

A
  1. The supply and demand for the underlying commodity or financial instrument must be large, and
  2. The different units of the underlying commodity or financial instrument must be fungible (easily interchanged)
189
Q

Today, future contracts are sold for what? 3

A
  1. Agricultural products, such as wheat, live cattle, and cocoa
  2. Commodities used in industry such as copper, gold, and crude oil
  3. Financial instruments, such as Treasury Securities, major currencies, and the S&P 500 Index.
190
Q

With the exception of treasury note and bond contracts, other types of financial futures have what?

A

They have cash settlements.

Series 66 (12 decks)

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