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Packaged Products: Other Flashcards

1
Q

Packaged Products: Other
UNIT INVESTMENT TRUSTS [UIT]
—————————————————
-“Shares Of Beneficial Interest”
1)management companies vs. UIT on what they issue to investors

  • Redeemable
    2) redeemable when
    3) redeemable at what price
A

1) Mgmt. companies issue shares that are either redeemable (mutual funds) or tradable (publicly traded funds), where UIT issue “shares of beneficial interest.” These are called “units” and represent an undivided interest in the portfolio of securities.
2) with the trust sponsor at any time
3) their Net Asset Value.

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2
Q

Packaged Products: Other
UNIT INVESTMENT TRUSTS [UIT]
—————————————————
-Fixed UIT
1) why is it fixed
2)Once the portfolio is established, can the portfolio buy or sell

  • Fixed Municipal UIT
    3) idea
    4) popular
A

1) fixed portfolio
2) no

3) assembles a portfolio of bonds targeted to a specific market [e.g., Colorado obligations-no tax for someone in CO]
4) yes

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3
Q 
Packaged Products: Other
UNIT INVESTMENT TRUSTS [UIT]
---------------------------------------------------
-Accumulation Account
1) Idea
  • Bonds Held In Trust / Units Represent Ownership Interest
    2) UIT is registered with who
    3) once registed, UIT can do what
    4) do asking price of the units typically include a slaes charge
    4. 1) sales charge high or low
    4. 2) example how much money is invested: 1 unit= $5k, sales charge of 4%
A

1) holds selected bonds until the trust if formally created, once the portfolio is created, funds are transferred in

2) SEC
3) sell units to investors
4) yes
4. 1) low
4. 2)4% X $5k= $200 sales charge; $5,000-$200= $4,800 invested

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4
Q

Packaged Products: Other
UNIT INVESTMENT TRUSTS [UIT]
—————————————————
-Trust Self-Liquidates
1) as bonds mature or are called, payment made to the investor is considered what

  • Expense Ratio
    2) low or high, why
    3) expenses that are incurred are
    4) between UIT and mgmt who has the greater percentage of gross interest income is available for distribution, and why
A

1) payments representing a return of capital
2) very low since there is no management (and therefore no management fee) and no brokerage fees (since the portfolio does not change)
3) legal, audit, and custodial fees
4) UIT, since there are lower expenses

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5
Q

Packaged Products: Other
UNIT INVESTMENT TRUSTS [UIT]
—————————————————
-Sponsor Makes A Market In Trust Units
1) If unitholders wish to redeem their trust units, they may do so where and when
2) sponsor will buy them back at what price
2.1) unit price go up or down depending on interest rates

A

1) sponsor, at any time.
2) NAV
2. 1) yes, interest up-price down

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6
Q

Packaged Products: Other
REITs
—————————————————
-Invest In Real Estate And Mortgages
1) A Real Estate Investment Trust (REIT) is similar to an open/closed-end investment?
2) difference between REIT and closed-end in what they invest in

  • “Shares Of Beneficial Interest”
    3) why better than investing in typical real estate
    4) listed on an exchange or trade over-the-counter,
    5) bought on margin and can be sold short? 6)registered securities under what act
    7) subject to SEC or IRS rules
    7. 1) patterned after the Investment Company Act of
A

1) closed
2) closed end= securities; REIT’s invests in real estate, short term construction loans and mortgages
3) REIT= investor achieves diversification and liquidity
4) can be both
5) true
6) Securities Act of 1933
7) both 7.1) 1940

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7
Q

Packaged Products: Other
REITs
—————————————————
-Trust organization
1)A “Trust” is organized as a legal entity under
2) managed by
3)Instead of issuing common shares, the trust issues
4) Other than technical differences, the trust is run in a similar fashion to what
5) Why are REITs highly leveraged
6) trust is managed by who

  • Equity REIT / Dividend Income
    7) invest mainly in?
    8) what do investors get for compensation
    8. 1) how is it figured
A

1) Trust Indenture
2) Board of Trustees
3) shares of beneficial interest
4) a corporation
5) Debt often exceeds 3 times the equity base, equity components of the funds capitalization is farily small, they borrow large amounts from banks and insurance companies in order to buy investment properties and mortgages
6) board of trustees
7) properties
8) dividend
8. 1)The net income from the properties (rents less operating expenses)

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8
Q

Packaged Products: Other
REITs
—————————————————
-Equity REIT Is Not Leveraged / Equity REIT Has Diversified Group Of Tenants
1)are not that highly leveraged because
2)investment types include
3) why is income diversified

A

1) the amount of debt carried is based solely upon net income from the properties
2) apartment houses, office buildings, shopping centers and hotels
3) income comes from a large group of smaller rental units with different tenants or users, if 1 tenant fails to pay, this does not have a serious effect on the overall income stream.

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9
Q

Packaged Products: Other
REITs
—————————————————
-Equity REIT Prices Tend To Move Opposite To Overall Stock Prices
1) prices tend to move in same or opposite direction to the overall stock market 1.1) especialy if
2) when do investors typically choose to invest in a REIT [shift away from bonds/stocks]

A

1) opposite 2) when interest rates are low
2) Bonds: if interest rates are low , bonds are not terribly attractive investments. Instead, investors allocate more of their investment funds to “hard” assets such as real estate. Stocks= if stock prices are flat

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10
Q 
Packaged Products: Other
REITs
---------------------------------------------------
-Mortgage REIT
1) invest mainly in 
1.2) Mortgage REITs also buy 
2) what is known as the spread 
3) why highly leveraged
  • Combination REIT
    4) what is it
A

1) mortgages and construction loans
1. 2) Mortgage Backed Securities (MBSs)
2) income for shareholders= The interest rate earned on the mortgages and construction loans should exceed the REIT’s borrowing costs
3) they make their income from the “spread” between their borrowing rate versus income from mortgages
4) Combination REITs combine aspects of both Equity and Mortgage REITs.

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11
Q

Packaged Products: Other
BUSINESS DEVELOPMENT COMPANIES [BDC]
—————————————————
-Business Development Company (BDC)
1) publicly traded?
2)investment companies permitted under what act
3) BDCs make investments in

  • Private-Equity Investments
    4) It provides financing to who and why
    5) BDC typically invests how much
    6) interest rate paid is quite high because
    7) BDC can have great upside to the investor why
A

1) yes
2) 1980 amendments to the Investment Company Act of 1940
3) privately-held start-up companies that are in their early growth stages.
4) start-up companies they cannot access the public markets because they have no track record [unreeliable cash flow]
5) $10 million to $50 million dollars in the form of debt that is convertible to equity
6) risky nature of the investment
7) earn substantial income stream, in addition to large capital gains if the company becomes successful and the debt investment is converted to equity @ IPO

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12
Q

Packaged Products: Other
BUSINESS DEVELOPMENT COMPANIES [BDC]
—————————————————
-BDCs Are SEC Registered And Are Exchange Listed / Conduit Tax Treatment
1)BDCs are registered as
1.1) benefit to investors
2)public trading market?
3)subject to the same tax rules as REIT & MF
4) what % of income as dividends are distributed [same as REIT]
5) do you need to be an accredited investor to invest

A

1) investment companies
1. 1)protection of SEC regulation
2) yes, shares are listed, like REIT
3) yes
4) 90%
5) no

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13
Q

Packaged Products: Other
HEDGE FUNDS / FUNDS OF HEDGE FUNDS
—————————————————
-HEDGE FUNDS
1)Are private investment funds open to who
2)registered under the Investment Company Act of 1940?
3) stance of the SEC on them
4) their investment strategies
5) does investment manager have a personal interest in achieving good investment results
6) MF vs. Hedge on how the advisor gets compensated 7) gains tend to be short or long

A

1) accredited (wealthy) investors.
2) no
3) because they are only open to wealthy investors, there is no need for extensive regulation [there on their own]
4) high risk, high return
5) yes, they invest a great deal of their own money in it
6) MF-adviser based on a percentage of assets under management, hedge fund managers take both a percentage of assets under management plus a percentage of capital gains
7) short

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14
Q

Packaged Products: Other
HEDGE FUNDS / FUNDS OF HEDGE FUNDS
—————————————————
-FUNDS OF HEDGE FUNDS
1) Registered open/ Closed-End under the Investment Company Act of 1940
2) why did it become available
3) listed on an exchange?
4) sold to a limited or unlimited number of investors
5) typically offered in minimums of how much
6) still illiquid and risky investments like a hedge fund? 7) gains tend to be short or long
8) what are the 2 layers of fees aking them fee-inefficient
9) when can an investor typically invest in them [when offered]
9.1) will fund periodically buy them back through a tender offer

A

1) closed
2) make “fund of hedge funds” available to a broader investor group [less rich]
3) no
4) unlimited
5) $25,000
6) yes
7) short
8) hedge fund manager compensated and MF manager that invests in Hedge gets a management fee
9) monthly or quarterly basis
9. 1) yes

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15
Q

Packaged Products: Other
DIRECT PARTICIPATION PROGRAMS (DPPs)
—————————————————
-Corporation Is A Taxable Entity
1) why are dividends said to be double taxed.
2) distribute losses to its shareholders?

  • Partnership Is Not Taxable
    3) tax happens at what level
    4) losses can be used to offset what
    4. 1) offset against earned income or portfolio income?
A

1) Corporations pay tax on them, investor who gets it must report and pay tax too
2) no, no such thing as a “negative dividend.”
3) owners personal tax return [pass through]
4) “passive income,
4. 1) no

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16
Q 
Packaged Products: Other
DIRECT PARTICIPATION PROGRAMS  (DPPs)
---------------------------------------------------
-General
1) why called this 
1.1) what do they often invest in 
 1.2) These are usually marketed as 
1.3) only available to what kind of investor
  • At Least 1 General And 1 Limited Partner
    2) Tax shelters are most often set up as what
    3) Have to have at least how many general and limited partners
    4) the general partner who assumes unlimited liability is who
A

1) allow investors to directly participate in the profit and loss from the business venture
1.1) commercial real estate or oil and gas production 1
.2) private placement offerings
1.3) only to wealthy accredited investors
2) limited partnerships
3) 1 of each
4)General partner

17
Q 
Packaged Products: Other
DIRECT PARTICIPATION PROGRAMS  (DPPs)
---------------------------------------------------
-Illiquid / Non-Correlated Assets
1) do they trade
 2) risky?
 3) why a good alternative asset
4) do they move the same with stocks and bonds
A

1) no
2) yes
3) diversify their portfolio holdings beyond stocks and bonds
4) no

18
Q

Packaged Products: Other
DIRECT PARTICIPATION PROGRAMS (DPPs)
—————————————————
-Types: Real Estate Program Tax Benefits
1) Once the property is ready for occupancy, it can be depreciated on a straight-line basis over how long
2) benefit to purchasing a home with a mortgage
3) what types of real estate have Tax credits

  • types: existing, new, government, raw-
    4) existing housing unknown issue
    4. 1) when can depreciation deduction start

5) new construction, all costs during the building period are capitalized [depreiation] and cannot be recovered until
5. 1) can it be capitalized with substantial negative cash flow
5. 2) why does new housing have more risk than existing housing for the investor
5. 2.1) because of this, the benefit to the investor

6) Government-Assisted Housing, known as what
6. 1) incentives who
6. 2) under this program, tenants pay what percent of their income as rent,
6. 2.1)who pays the remainder, up to FMV rent
6. 3) depreciation the same as normal [27 1.2]
6. 4) An additional tax benefit is given if the housing is what
6. 4.1) costs qualify for an additional what % tax credit 6.5) building have low or high appreciation potential 6.5.1) how about maintenance costs

7) Raw Land, is usually purchased for what reason
7. 1) why little tax shelter
7. 2 tent to have negative cash flow, and why

A

1) 27½-year life
2) reducing the cash downpayment, and deduct interest 3) low-income housing and certified historic structure rehabilitation.
4) tenant stability
4. 1) ready for occupancy= right away
5) the building is ready for occupancy
5. 1) no
5. 2) take awhile to get rent role up, delays in building, higher then estimated building costs
5. 2.1) new housing has greater appreciation potential
6) Section 8” Housing
6. 1) builder to build subsidized housing
6. 2) 25%
6. 2.1) Federal Government
6. 3) yes 6.4)rehabilitated
6. 4.1) 4%
6. 5)low
6. 5.1) high

7) future capital gains
7. 1) land is not depreciable
7. 2) yes, cost of financing and taxes with little revenue

19
Q

Packaged Products: Other
DIRECT PARTICIPATION PROGRAMS (DPPs)
—————————————————
-Oil And Gas Programs / Depletion Deduction
1) cost to purchase mineral rights deductible
1.1) what can be T/F
1.1.1) capitalized and recovered by depletion over the life of the well if what happens
2) what is intangible drilling costs” (IDCs).

  • Intangible Drilling Costs Immediately Deductible
    3) benefit
A

1) no
1. 1)is capitalized
1. 1.1) and recovered by depletion over the life of the well if oil is found and sold
1. 1.1) oil is found and sold
2) wholes left by a hired contractor used to look for minerals

3) normally would require that the intangible drilling costs be added to the mineral rights cost, and both would be recovered over the life, but congress wants to encourage oil drilling so its immediately deductible in full

20
Q

Packaged Products: Other
DIRECT PARTICIPATION PROGRAMS (DPPs)
—————————————————
-Tangible Costs Recovered By Depreciation
1) example of tangible costs
2) recovered by depreciating the assets over their accounting life using what method
3) Once oil is extracted and sold, the remaining cost to be recovered is
3.1) what allow this to be recovered, and what two methods are available
3.1.1) which one gives a larger deductions

  • Cost Depletion
    4) example of how it works
  • Percentage Depletion /
    5) example of how it works
A

1) cased holes [to get oil out], Pipelines and storage facilities
2) accelerated method (MACRS)
3) mineral rights cost 3.1) depletion, cost depletion or percentage depletion. 3.1.1) percentage depletion

4) mineral rights cost $10,000,000 and 1,000,000 barrels of oil are found. The “cost” of each barrel of oil is $10.00. As each barrel is sold (assume at $100 per bbl.), a depletion deduction of $10.00 is allowed under the cost method.
5) as oil is sold, depletion is set at an arbitrary 15% of the sale amount (regardless of the actual cost of the oil). If the oil is sold for $100 per bbl., the depletion allowance for that bbl. is 15% of $100 = $15. In our example, an extra $5 deduction is achieved under the percentage method. This is a large tax advantage.

21
Q

Packaged Products: Other
DIRECT PARTICIPATION PROGRAMS (DPPs)
—————————————————
-Exploratory / Wildcat Well
1) drill in an area where existing wells are
2)The mineral rights cost is high or low
3) intangible drilling costs are low/ high and why
3.1) how about tangible costs [storage] m referred to as wildcats

  • Developmental / Step-Out Well
    5) wells are drilled where
    6) The mineral rights cost is high or low
    7) intangible drilling costs are low/ high and why
    7. 1) how about tangible costs
    8) how is the risk
    9) why known as “step-out” wells?
  • Income / Stripper Well
    10) investors buy what
    11) The mineral rights cost is high or low
    12) There are no IDCs because
    12. 1) how about tangible costs
    13) how is the risk
    14) what is a “stripper” well
A

1) no, new area
2) high
3) High, the drilling contractor must get the crew and equipment to a remote location
3. 1) high for the same reason
4) high-risk high return

5) near an existing oil field
6) higher because of the greater probability of finding oil 7) low, because drilling contractors are working nearby.
7. 1) lower because existing pipelines and storage facilities are nearby
8) moderate
9) stepping out” from adjacent fields

10) a producing oil well with proven reserves in the ground.

11) the highest because the approximate amount of oil underground is known
12) the well is drilled 1
12. 1) lowest because the well is already producing and is “hooked up.”
13) Risk is lowest; so is potential return.
14) abandoned well, that produce less than 10 barrels of oil per day

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