Series 66 Unit 5

advantages of DPPs

-investment managed by others -flow through of income and certain expenses -limited liability

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.

Ans: 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.

An investor is reading a report that industrial demand for copper is expected to double in the next 5 years. This might lead the investor to A. buy corn futures. B. sell copper futures. C. invest in several copper mining companies. D. modify the investor's portfolio to take a larger cash position.

Ans: C If the demand for copper increases, those companies producing the commodity should find their stock prices increase nicely. Selling copper futures would be when one expects the demand (and, therefore, prices) to fall.

Investors interested in adding precious metals to their portfolios would likely consider A. coal. B. diamonds. C. gold. D. tin.

Ans: C Of these choices, only gold is considered a precious metal. Diamonds are certainly precious, but they are not a metal. Tin, is a metal, but is not considered precious.

general partner (GP)

active investors in a limited partnership and assume responsibility for all aspects of the partnership's operations makes decisions that bind the partnership buys and sells property for the partnership manages the partnership property and money supervises all aspects of the partnership's business maintains a minimum of 1% financial interest in the partnership have unlimited liability

Direct Participation Program (DPP)

alternative investment generally limited partnerships and allow the economic consequence of a business to flow-through to investors income or loss is considered passive because the investor does not take an active role in the management of the business pay no dividends, offer limited liability , illiquid

structured note with principal protection

any structured product that combines a bond with a derivative component and that offers a full or partial return of principal at maturity

commonly traded commodity

crude oil and coffee

FINRA warns investors that most leveraged and inverse ETFs "reset" ________, meaning that they are designed to achieve their stated objectives on a ________ basis

daily Their performance over longer periods of time—over weeks or months or years—can differ significantly from the performance (or inverse of the performance) of their underlying index or benchmark during the same period of time. Therefore, in most cases, these would not be suitable investments for buy and hold investors or those with other than a very short time horizon.

ETNs

exchange traded notes (ETNs) register under the securities act of 1933 (debt instruments) type of exchange traded debt instrument offering a return linked to a market index or other benchmark rather than periodic interest payments risks include: credit risk market risk liquidity risk call, early redemption, and acceleration risk conflicts of interest The long-term expected value of your ETNs is zero. If you hold your ETNs as a long-term investment, it is likely that you will lose all or a substantial portion of your investment.

why invest in a specific limited partnership

it is economically viable the investor can make use of the potential tax benefits the GP(s) has (have) demonstrated management ability and expertise in running similar programs the programs objectives match the investor's objectives and do so within a time frame that meets the investor's needs the start-up costs and projected revenues are in line with the start-up costs and revenues of similar ventures

disadvantages of DPPs

liquidity risk legislative risk risk of audit depreciation recapture - One of the tax benefits is the ability to depreciate most fixed assets, especially when that depreciation can be accelerated. The effect of the depreciation deduction is to lower the tax basis of the asset. If that asset is then sold for more than that basis, the excess is "recaptured" and subject to tax, possibly at ordinary income tax rates.

risks of structured products

little or no liquidity returns are not fully realized until maturity credit risk lack of efficient pricing

Limited Partner (LP)

passive investors with no management or day to day decision-making responsibilities are not held personally responsible for the partnership's indebtedness

benefits of investing in commodities

potential hedge against inflation diversification because commodities are generally not correlated with stock market returns potential returns

risk of investing in commodities

principal risk (commodity prices can be extremely volatile) risk of investing in foreign markets high leverage can work against the investor in a down market lack of income