Unit 17 summed

In discussing a direct participation program with your customer, rank the following items in order of importance from most to least.

A program's economic viability is the first priority in the assessment of DPPs. The IRS considers programs designed solely to generate tax benefits abusive. Because there is a very limited secondary market for DPPs, liquidity and marketability should be a low priority. Potential for economic gain Tax write-offs Liquidity and marketability

ETNS

Exchange-traded notes, sometimes called equity-linked notes, are registered under the Securities Act of 1933 as debt instruments. All of the other choices are registered as investment companies under the Investment Company Act of 1940.

Alternative investments

include 4 major categories: real assets, hedge funds, private equity, and structured products.

Non-exchange-traded structured securities products (SSPs) typically have

some form of embedded derivatives It 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.

Which of the following terms best describes ETNs and leveraged ETFs?

These are two popular alternative investments. Are they speculative? Yes, but there are many other speculative investments that are not considered alternative investments. The question asks for the best description and, although it might seem like a "close call", these are "alts". The leveraged ETF is a registered investment company, but the ETN is not.

One of the benefits of adding precious metals to an investor's portfolio is

a potential inflation hedge.

ou have a 70-year-old client with a $500,000 whole life insurance policy purchased 25 years ago. The policy currently has a cash value of approximately $150,000. With all of the children on their own and successful, the client no longer feels the need for the insurance, and asks you if there is any option that might result in netting more than surrendering the policy for its cash value. You might recommend

A life settlement, involves selling an existing life insurance policy for an amount in excess of the cash value, but less than the death benefit. Exact numbers are hard to compute without knowing all the details of the type of policy and health of the insured, but it would certainly be well above the $150,000 cash value. If the question indicates a terminally ill individual, the answer would be a viatical. An IRS Section 1035 transfer to an annuity will not put any additional cash in the client's hands.

Among the differences between an investment in a limited partnership offering and in a corporation is that limited partnership offerings do not pay dividends; corporations do.

One of the key features of a limited partnership investment is the concept of flow-through of operating results. If the business operates at a loss, the limited partner's share of that loss is treated as a passive loss on the investor's tax return. If the business is profitable, the limited partner's share of the profit is treated as passive income. Corporations issue securities, primarily stocks and bonds, while limited partnerships issue units representing the limited partner's interest in the venture. Those units are investment contracts and, as taught in Unit 4, LO4, securities. Limited partners who take an active role in the partnership lose their limited status.

A feature common to all passive real estate investing is

The concept of passive investing is that, in all cases, someone else is "running the show". Although some passive real estate investments, such as the exchange-traded REIT, are very liquid, others, such as DPPs, are generally not. In the same vein, while one can purchase a REIT for as little as the price of 1 share, a unit in a RELP (real estate limited partnership) can be $25,000 or more. Finally, although DPPs are flow-through vehicles, REITs and ownership of stock in real estate companies are not.

A benefit of active investment in real estate that is not available to purchasers of REITs is

Under Internal Revenue Code Section 1031, no gain or loss is recognized on the exchange of real estate held for investment if such property is exchanged solely for real estate of like-kind which is to be held for investment. This does not apply to REITs where an exchange is considered a sale with a realized gain or loss for tax purposes. Section 1035 is similar in concept, but deals with insurance products, usually annuities. Dividends are paid by corporations, not those who flip houses and, because most REITs are publicly traded, they are the ones with greater liquidity.

With respect to liquidity and potential for diversification, in comparing alternative investments to exchange-traded stocks, the markets for alternative investments are generally:

less liquid and provide more opportunity for diversification. Alternative investments can provide exposure to unique risks and trading strategies and thus provide good diversification to a stock and bond portfolio. The markets for alternative investments are generally less liquid than most listed stocks.