Unit 5 - Alternative Investments & Other Assets (Study Guide)

Question 1

What is a Direct Participation Program?

Answer 1

A direct participation program (DPP) is a type of investment that allows investors to pool their money to fund long-term projects, such as real estate or energy-related projects. DPPs are considered alternative investments and are often structured as limited partnerships or REITs. Investors, known as limited partners, contribute their money to a general partner who then invests the pooled capital on their behalf. This structure allows investors to participate in the business’s income and tax benefits without having to manage the project.

Question 2

In a direct participation program, liability for the debts of the business falls upon the

A. general partner(s).
B. limited partner(s).
C. shareholder(s).
D. agent(s) selling the program.

Answer 2

A

DPPs consist of at least one GP and one LP. The liability of the limited partners is limited to their investment, including commitments made but not yet fulfilled. On the other hand, the general partners bear the liability for the debts of the entity.

Question 3

One of the ways that investing in a real estate limited partnership (RELP) differs from investing in a REIT is that

A. the DPP pays dividends, while the REIT does not.
B. the REIT passes through at least 90% of its taxable income, while
the DPP retains the income.
C. the DPP is a pass-through vehicle for both income and loss,
while the REIT does not pass through losses.
D. DPPs generally have greater liquidity than REITs.

Answer 3

C

Question 4

A direct participation program is a form of business entity. It may purchase real estate, drill for oil or gas, or engage in a number of other business activities. Which of the following statements is true?

A. Management of the enterprise is generally in the hands of a
committee formed by the largest investors.
B. Management of the enterprise is always in the hands of the
general partner(s).
C. Management of the enterprise is under the control of a
committee consisting of limited and general partners.
D. Limited partners may not participate in management affairs
until at least one year has passed since the offering is
completed.

Answer 4

B

Question 5

What are some of the risks of ETNs as an investment tool?

Answer 5

Credit Risk (ETNs are senior unsecured debt obligations)
Market Risk
Liquidity Risk (although exchange traded, a trading market may not develop)
Call, Early Redemption, & acceleration risk (ETNs may be called at the issuer’s discretion
Conflicts of Interest (Shorting, for instance)