WEEK 3: Pooled Investments, Derivative Securities, and Other Securities

Question 1

Pooled Investments

Answer 1

most common method for individual investors to participate in the market

Question 2

types of pooled investments

Answer 2

mutual funds, exchange traded funds (ETFs), unit investment trusts (UITs), private or separately managed accounts, guaranteed investment contract (GICs)

Question 3

mutual funds

Answer 3

professional management, diversification for small $ investment, wide range of assets, high liquidity, easy to buy

Question 4

mutual fund prospectus

Answer 4

brochure providing information on fund’s objective, strategies, risks, past performance

Question 5

combination equity-bond funds

Answer 5

balanced fund: 60% stock 40% bonds
equity income: 70-80% stock, 20-30% bond
flexible allocation: varies
growth and income: primarily stocks that pay dividends

Question 6

target-date funds

Answer 6

designed for investors who need money at a certain age or date, shifts more conservative mix the closer to due date

Question 7

market indexes

Answer 7

market indexes track the performance of different segments of the market

Question 8

index construction

Answer 8

indexes vary based on specific grouping of securities at the weighting of each security
market cap weighting: money invested into the index will be primarily invested in the large-cap indexed companies

Question 9

open-end mutual fund

Answer 9

unlimited shares, investors buy and sell directly from investment advisor company, transactions clear at end of day based on net asset value (NAV)

Question 10

mutual fund fees and expenses

Answer 10

advisory fees, sales loan (charge for distribution and marketing): no load, front-end load, level load, back-end load, annual 12b-1, administrative fees

Question 11

breakpoint schedule

Answer 11

discounted sales charge for larger-dollar investment

Question 12

closed-end mutual funds

Answer 12

limited number of shares, initial float goes to fund, trades share on secondary market, exchange during the day, linked to supply and demand, no need for manager to liquidate shares

Question 13

Exchange Traded Fund (ETF)

Answer 13

basket of securities, easy to trade, highly liquid, tax efficient, variety of asset categories, no 12b-1 or sale charges, between you and another buyer

Question 14

Unit Investment Trust (UITs)

Answer 14

invest in a portfolio of fixed income securities, self-liquidating, passive investment, illiquid, assets held in trust

Question 15

Real Estate Investment Trusts (REITs)

Answer 15

1. mortgage: income from mortgage and contractor loans
2. equity: rent/cap gain on property sale
3. hybrid (combo)
   advantages: exposure to asset class, professional management, diversification with small $ investment, liquid, limited liability exposure

Question 16

commercial annuities

Answer 16

a non-qualified commercial annuity is a tax-advantaged insurance product designed to produce retirement income

Question 17

Derivative Products

Answer 17

financial securities that “derive” their value from the underlying asset: options, future/forward contracts, convertible securities, warrants, rights

Question 18

option characteristics

Answer 18

an option contract has two sides to the trade - buyer and writer. right vs obligation: option owner has the right to exercise, the writer has the obligation to perform if exercised, offers financial leverage

Question 19

call option

Answer 19

provides buyer with the right to purchase security, buyer pays seller a premium
call buyer (owner) has the right to buy something. call writer (seller) is obligated to deliver the security and receive agreed upon price
exercise when current price is greater than strike price

Question 20

put options

Answer 20

right to sell at a predetermined price by a predetermined period of time
“Call buyer” (owner) the right to buy something at a set price for a certain period
“Call writer” (seller) obligated to deliver the security and receive the agreed upon price
exercise when current price is less than strike price

Question 21

forward contract

Answer 21

custom agreement between two parties, one agrees to buy at some point in the future at specified price, other agrees to deliver, reflects negotiation

Question 22

future contract

Answer 22

standardized forward contract, clearing house, contract can be sold on secondary market before delivery date, settled in cash

Question 23

“long” vs “short”

Answer 23

long: has a $1 for $1 gain as stock rises
short: has a $1 for $1 loss as stock rises

Question 24

convertible securities

Answer 24

can be converted to another type of security, at discretion of the owner

Question 25

municipal fund securities

Answer 25

securities issued by state or local municipalities
municipal bonds: general vs revenue
municipal fund securities: 529 savings, local government investment pools, ABLE accounts

Question 26

college savings accounts

Answer 26

529 pre-paid tuition plan
529 savings plan
coverdell education savings plan (federally sponsored)

Question 27

ABLE Account

Answer 27

achieving a better life experience, tax-advantaged savings plan for individuals with qualifying disabilities

Question 28

Real Estate Investment Trust (REITs)

Answer 28

closed-end mutual fund that provides exposure to real estate, offer tax-advantaged income without double taxation (pass through income), 75% must be invested in real estate, pass through 90% of cash flow

Question 29

Direct Partnership Programs (DPPs)

Answer 29

investment in alternative asset class, illiquid, predictable cash flows

Question 30

Exchange Traded Note (ETN)

Answer 30

debt issued by financial institution which is designed to track performance of benchmark, credit risk, unsecured debt, liquidity varies