Series unit 17

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

C

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

C

A number of different pooled investment vehicles are included in the term "alternative investment." One of them, a synthetic investment instrument that has been created to meet a specific need that cannot be met by a standardized financial instrument, is known as A) an inverse fund B) an arbitrage C) a structured product D) a z-tranche CMO

C Structured products are created as a tool to meet the issuer's debt financing needs when they will result in a lower cost than a standardized financial instrument available in the market place.

low-through is one of the features of A) open-end investment companies B) REITs C) variable annuities D) direct participation plans

D

Which of the following is true regarding ETNs? A) Their value can be impacted by changes in the issuer's credit rating. B) As fixed-income investments, they do not have market risk. C) They are non-callable prior to maturity. D) They are suitable for conservative investors seeking income.

A

Which of the following most accurately identifies a private equity investment in income-producing real estate? A) Private market mortgage lending by an insurance company B) Investment in a real estate investment trust (REIT) C) Direct ownership of real estate properties D) Investment in a real estate mutual fund

C

Which of the following securities is eligible for a Section 1031 exchange? A) Annuities B) Direct participation programs C) Investment real estate D) Listed stocks

C Section 1031 of the Internal Revenue code deals with like-kind exchanges of real property that is held for use in a trade or business or for investment. Real property, also called real estate, includes land and generally anything built on or attached to it. The benefit is that no taxes are paid on gains until the last sale of the property. In simple terms, it permits tax-deferral of gains when real estate is exchanged for other real estate.

Which of the following is NOT a feature in owning a limited partnership? A) Flow-through of income and expenses of a business to the individual limited partner B) Tax-free income C) Legislative risk D) An investment managed by others

B The income from limited partnerships is not tax exempt. An investor, however, may use a tax loss from a partnership to offset the income from another passive investment. In limited partnerships the investor enjoys the advantages and disadvantages of owning a business without having to actually manage one. Limited partnerships are vulnerable to legislative changes that adversely impact ownership of such investments.

Which of the following terms best describes ETNs and leveraged ETFs? A) Forms of hedge funds B) Speculative investments C) Registered investment companies D) Alternative investments

D

A client was reading an offering document for an oil and gas drilling limited partnership program and noticed that one of the features was flow-through benefits. How would you explain this? A) Losses generated by the program pass through to the investor and may be deducted in full against ordinary income. B) Rather than being a separate taxable entity, the program's income or losses pass through directly to the investors. C) Once the program has paid taxes on its income, the entire remaining balance passes through to the investors. D) Investors in the program are assured of a steady flow of income if the drilling is successful. Explanation

B The philosophy behind flow-through is that any income or losses generated by a program of this type (DPP) flow directly to the investors—there is no tax at the entity level. If there are losses, they may only be deducted against passive income (e.g., income from other partnerships). No assurances can ever be given

In discussing a direct participation program with your customer, rank the following items in order of importance from most to least. Tax write-offs Liquidity and marketability Potential for economic gain A) III, I, II B) I, II, III C) III, II, I D) II, III, I

A

Investing in commodities could involve investing in any of these EXCEPT A) consumer durables B) animals C) agricultural items D) industrial items

A

Which of the following investments is least appropriate for a client primarily concerned with liquidity? A) Direct participation program B) Municipal bond mutual fund C) Preferred stock D) Bank savings account

A

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

B

One type of alternative investment considered to be a pooled investment vehicle is the exchange-traded note. Exchange-traded notes (ETNs) are unsecured debt securities unsecured equity securities issued by financial institutions, such as banks insured by the FDIC A) I and IV B) I and III C) II and III D) II and IV

B

Real estate investing can be passive or active. An example of a passive real estate investment would be A) managing an apartment building B) a real estate limited partnership C) flipping homes D) renting out single family homes

B

You have a client who wishes to allocate a portion of his funds to investment real estate in an attempt to generate additional income. That goal could be reached by investing in any of the following EXCEPT A) rental real estate B) raw land C) real estate limited partnerships D) REITs

B

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 2 years of drilling without success, the project was foreclosed with outstanding debt of $4 million. Your client is liable for A) $150,000 B) $400,000 C) $0 D) $250,000

C

One way in which active and passive real estate investing differ is that A) only real estate professionals can deduct losses from active real estate investing. B) there are circumstances under which losses from passive real estate investing can be deducted against ordinary income C) there are circumstances under which losses from active real estate investing can be deducted against ordinary income D) losses from active real estate investing can only be deducted against income from other active investing projects

C

You 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) using IRS Section 1035 to transfer the cash value into a deferred annuity B) keeping the policy because the cash value will continue to grow C) engaging in a life settlement D) canceling the policy, but leaving the cash value with the insurance company with interest

C 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.

Although the terms are frequently used synonymously, historically, viatical settlements differed from life settlements in that A) the seller of the viatical policy was someone with a life expectancy of up to 15 years B) the buyer of the viatical policy did not know the identity of the seller C) the buyer of the viatical policy was someone who was terminally ill D) the seller of the viatical policy was someone who was terminally ill

D

In a limited partnership program, which partners manage the partnership's day-to-day operations and incur unlimited personal liability for the partnership's debts? A) The limited partners. B) Both the general partners and the limited partners. C) Neither the general partners nor the limited partners. D) The general partners.

D

Being a limited partner in a direct participation program is analogous to being A) a holder of secured corporate debt. B) a member of the board of directors of a corporation. C) an agent of a broker-dealer. D) a holder of common stock in a corporation.

D Limited partners in DPPs are owners of the business in much the same way as common stockholders of a corporation. They assume no management responsibilities simply by virtue of their ownership interest. Similarly, limited partners share the same type of limited liability as corporate shareholders

An investor in a high tax bracket who invested in a DPP should have which of the following characteristics? Need for tax benefits Substantial liquid assets Ability to identify both risks and merits of the program Ability to commit money for a long time A) I and II B) I, II, III, and IV C) II, III, and IV D) II and III

b