Unit 5

The price of which of the following commodities is most likely to be impacted by weather? A) Lead B) Gold C) Livestock D) Orange juice

If you ever saw the movieTrading Places with Eddie Murphy and Dan Aykroyd, you would certainly know that weather can have a major impact on the orange crop. Metals are not affected by heat, cold, rain, or snow. Years ago, before heated/air-conditioned barns and other protective devices, livestock would freeze in a bad winter, but that is no longer much of an issue.

Someone who wishes to invest in precious metals would consider any of the following except A) platinum. B) gold. C) lead. D) silver.

Lead is not considered a precious metal. D

Among the characteristics of leveraged exchange-traded funds is that A) leveraged ETFs may be purchased on margin. B) leveraged ETFs generally obtain the leverage through bank borrowing. C) they can only be sold to accredited investors. D) they are generally suitable for investors with a long time horizon.

Because an exchange-traded fund is purchased and sold on an exchange, the rules generally applying to all exchange products, such as purchasing them on margin, would apply. Leveraged funds use derivative products to generate the leverage, not bank borrowing. When it comes to suitability, they are for aggressive investors, but there is no requirement that they meet the accredited investor standard. However, the very nature of the product is that it is designed for short-term trading, not long-term trading. A

In general, an investor wishing to gain economic exposure to commodities would find it easiest to do so by A) investing in futures contracts. B) investing in forwards contracts. C) growing the commodity. D) buying the commodity directly.

It is generally agreed that using commodity futures is the easiest and most common way to gain economic exposure to commodities. Forwards are more commonly used by producers or users because, unlike futures, most forwards contracts result in the delivery of the actual commodity. Only about 1% of all futures contract positions involve the delivery of the underlying commodity. A

Which of the following statements regarding the general partner (GP) in a direct participation program (DPP) is not true? A) A GP has a fiduciary relationship to the limited partners (LPs). B) The GP, as the active manager of the partnership, does not maintain a financial interest in the partnership and only receives income distributions from profits on the business prior to the limited partners. C) The GP cannot borrow from the partnership, compete with the partnership, or commingle personal fu

The GP, as the active manager of the partnership, does not maintain a financial interest in the partnership and only receives income distributions from profits on the business prior to the limited partners.General partners (GPs) must maintain a financial interest in the partnership and generally do not receive distributions from profits before those paid to the limited partners. The GP is the active investor in a limited partnership and assumes responsibility for all aspects of the partnership's operations and has a fiduciary relationship to the LPs. The GP, as a fiduciary, cannot borrow from the partnership, compete with the partnership, or commingle personal funds with partnership funds. D

A high-net-worth client of yours invested $250,000 into an oil and gas limited partnership drilling program for which she received a 10% interest in the project. Unfortunately, after two years of drilling without success, the project was foreclosed with outstanding debt of $4 million. Your client is liable to the partnership's creditors for

$0, An investor's liability in a limited partnership is generally limited to the original investment. If there are any funds that the investor has committed for, but not yet contributed to, there is a liability for that amount as well. C

A REIT and a direct participation program are similar because they both A) are traded actively in the secondary market. B) can be described as a limited partnership. C) pass through losses to investors. D) are operated by a centralized management.

Both a REIT and a DPP are run by centralized management. A REIT may not pass through losses to its investors, and it is not a limited partnership. A DPP cannot be easily traded in the secondary market. D

In search of higher returns, many investors have turned to alternative investments, such as structured products. Non-exchange-traded structured securities products (SSPs) typically have A) some form of embedded derivatives. B) FDIC insurance coverage. C) a place in the portfolio of conservative investors. D) moderate liquidity.

some form of embedded derivativesIt is commonplace for SSPs to use derivatives, such as options. There is no insurance coverage and, unless listed for trading such as an ETN, low or no liquidity. These are highly complex products and would not be suitable for the average conservative investor. A

One reason for including commodities in an investment portfolio is because they have a high correlation to A) the stock market. B) the bond market. C) the U.S. dollar. D) the inflation rate.

Because commodity prices usually rise when inflation is accelerating, investing in commodities may provide portfolios with a hedge against inflation. In contrast, stocks and bonds tend to perform better when the rate of inflation is stable or slowing. D

Your customer is asking if either exchange-traded funds (ETFs) or exchange-traded notes (ETNs) might be suitable investments for his portfolio. The customer makes several statements regarding his understanding of the products, but only one of them is accurate. Which is it? A) ETNs are equity securities because they trade on exchanges. B) ETFs have a fixed coupon rate that I should expect to realize when they mature. C) If I want to sell my shares of an ETF, I have to wait until the next price is

The only accurate statement is the one expressing that ETNs are issued by financial institutions and, therefore, the credit worthiness of the issuer should be a concerning factor. ETNs are debt instruments, not equity instruments. ETNs have a final payment at maturity based on the return of a single stock, a basket of stocks, or an equity index. Although ETF prices fluctuate based on the value of the securities within the fund portfolio throughout the trading day, they are priced by supply and demand, like all exchange-traded products. They are not forward priced like open-end mutual fund shares are. D

Which of the following is a motivation for creating structured products? A) Structured products improve market completeness. B) Structured products are less expensive for investors to buy and trade. C) Structured products improve profits for broker-dealers. D) Structured products reduce costs to issuers.

The primary motivation for financial structuring is to increase market completeness. What does that mean? As stated in the LEM, structured products are created to meet a specific need for which there is nothing available in the current market. Creating this structured product is said to be "completing the market." Creating structured products is a cost to issuers. Investors pay fees to access structured products in addition to transaction costs. They may, in fact, improve the structuring broker-dealer's profits, but that is not what NASAA will be looking for as an answer. A