SIE CH.9
Which of the following limited partnerships is the least likely to generate income? A) An existing property limited partnership B) A raw land limited partnership C) A government-assisted housing limited partnership D) A currently producing oil and gas drilling limited partnership
B) A raw land limited partnership A limited partnership that invests in raw land is not designed to generate income. Instead, raw land investments are suitable for investors who are seeking appreciation in the value of the property. Partnerships that invest in existing properties and government-assisted housing properties are types of real estate programs that are more likely to generate income.
All of the following statements concerning hedge funds are TRUE, EXCEPT the funds: A) May engage in short selling B) Must register under the Investment Company Act of 1940 if offered to U.S. residents C) May borrow funds in an attempt to boost returns D) May concentrate assets in a few positions
B) Must register under the Investment Company Act of 1940 if offered to U.S. residents Hedge funds are investments that resemble mutual funds, but are typically only offered to wealthy investors. Hedge funds often employ aggressive financial strategies such as short selling, the use of leverage (borrowed funds), and placing large bets on individual companies or sectors of the market. These funds are not generally required to register with the SEC due to the accredited status of their investors.
Which of the following statements is TRUE concerning registered nontraded real estate investment trusts (REITs)? A) They offer investors the same amount of liquidity as exchange-traded REITs B) They are required to distribute the same percentage of taxable income as exchange-traded REITs C) They are not required to make periodic disclosures that are required of exchange-traded REITs D) They are suitable for the same investors as exchange-traded REITs
B) They are required to distribute the same percentage of taxable income as exchange-traded REITs Most REITs are traded on an exchange, such as the NYSE, and offer investors a high degree of liquidity. Nontraded REITs do not have their shares listed on an exchange and offer very limited liquidity, similar to limited partnerships. They would not be suitable for investors seeking liquidity. Both invest in various types of real estate and are subject to the same tax consequences (90% distribution on taxable income). Since they are both registered, they are required to make the same disclosures to investors.
Which type of investment is typically purchased by an accredited investor? A) A closed-end fund B) A mutual fund C) A hedge fund D) An exchange-traded fund
C) A hedge fund Most hedge funds are established as limited partnerships and sold through private placements (under Regulation D). They're typically purchased by accredited investors.
Which of the following requires a limited partner to deposit additional funds? A) A tax credit B) An assessment C) Depreciation D) A passive loss
C) An assessment If a limited partner is subject to an assessment, it is a request by the partnership for additional funds. Failure to provide the funds may result in the limited partner's losing her investment interest in the program.
If a REIT generates at least 75% of its income from rents or mortgage interest, and pays out at least 90% of its income to the shareholders, for tax purposes the income distributed by the REIT will be taxable to: A) The REIT and not the shareholders B) The shareholders and not the REIT C) Both the shareholders and the REIT D) Neither the shareholders nor the REIT
C) Both the shareholders and the REIT To qualify as a REIT, it must receive no more than 25% of its revenue from subsidiary (non-real estate) activities and must be structured and established as a trust. Also, the REIT must distribute a minimum of 90% of its income. Shareholders are responsible for paying taxes on the income distributed by the REIT. This income is treated as a nonqualifying dividend for tax purposes.
Which of the following is NOT a pass-through entity? A) Limited Liability Company (LLC) B) Real Estate Investment Trust (REIT) C) C Corporation D) S Corporation
C) C Corporation A pass-through entity is a business that avoids double taxation. Instead, the income passes or flows through to the owners of the business. S Corporations, LLCs and REITs are considered pass-through entities. Income generated by C Corporations is taxed twice (once at the corporate level and again at the investor level); therefore, they are not pass through entities.
Which type of investment will provide the LEAST amount of information on its holdings? A) An exchange-traded fund (ETF) B) A mutual fund C) A closed-end fund D) A hedge fund
D) A hedge fund Most hedge funds are established as limited partnerships and sold through private placements (under Regulation D). Hedge funds provide some, but not complete or timely, information on their holdings. On the other hand, ETFs, closed-end funds, and mutual funds are considered investment companies and are required to disclose complete and timely information on their holdings.
SPDR is considered a type of:
Exchange-traded fund Standard & Poor's Depositary Receipt (SPDR) is a type of exchange-traded fund (ETF). It can be used to refer to a specific exchange-traded fund that tracks the S&P 500 or a group of ETFs.
An investor is interested in selling 500 shares of her listed REIT. The sale will be handled in a manner that's similar to the:
Liquidation of a stock on the NYSE A secondary market exists for real estate investment trusts (REITs). The vast majority of REITs trade on the NYSE with prices that are determined by the forces of supply and demand.
When purchasing shares of an ETF, an investor pays the:
Market price plus a commission The trading of exchange-traded fund (ETF) shares is similar to traditional stock. When ETF shares are purchased, the investor will pay the market price plus a commission.
When comparing a direct participation program (DPP) to a publicly traded real estate investment trust (REIT):
REITs must have 100 shareholders and DPP interests cannot be sold to more than 35 non-accredited investors One of the requirements for REITs is that they must have at least 100 shareholders; however, DPPs don't have this requirement. DPP interests are not publicly traded; instead, they typically raise capital through a private placement under Regulation D. Under this regulation, no more than 35 non-accredited investors can purchase the private placement offering. REITs must distribute a minimum of 90% of their income, while DPPs must distribute 100% of their income.
An equity inverse exchange-traded fund (ETF) is most similar to:
Selling stock short An equity inverse ETF is designed to deliver the opposite of the performance of an index or other benchmark. Similarly, a customer who sells stock short is anticipating a decline in the price of the equity securities. For example, an inverse ETF that's based on the DJIA seeks to deliver the opposite performance of that index. Therefore, if the DJIA rises by 1%, an inverse ETF's value should decrease by 1%. Conversely, if the DJIA falls by 1%, the inverse ETF's value should increase by 1%.
The person who distributes interest in a DPP is referred to as the:
Syndicator A syndicator (underwriter) is the person that distributes interests in a direct participation program (DPP).
What is the typical maturity for an ETN?
10 to 30 years Exchange-traded notes (ETNs) are long-term securities which typically have maturities between 10 and 30 years.
When selling limited partnership interests, a registered representative is NOT required to: A) Certify that the customer is an institution B) Ensure that she has disclosed to the customer the investment's lack of liquidity C) Ensure that the customer has a net worth to sustain a total loss of the investment D) Ensure that the limited partnership investment is suitable for the customer
A) Certify that the customer is an institution When selling limited partnership interests, a registered representative is required to ensure that she informed the customer of all relevant facts relating to the investment's lack of marketability and liquidity. In addition, after obtaining information about the customer's investment objectives, financial and tax status, other investments, and future financial needs, the RR must have reasonable grounds to believe the customer has sufficient net worth and income to lose his entire investment, or has other liquid assets. The RR must certify that the customer is suitable and is in a financial position to be investing in limited partnership interests. However, there is no requirement to certify that the customer is an institutional investor. Keep in mind, there is a difference between an accredited investor (e.g., a person who has net worth of at least $1,000,000 or annual income of at least $200,000), which is defined under Regulation D, and an institutional investor (a financial institution or an account with at least $50 million of invested assets), which is defined by FINRA.
Which of the following investments generally distributes dividends and capital gains, mirrors a securities index, and can be purchased on margin? A) ETF B) Mutual fund C) ETN D) ADR
A) ETF ETFs have a portfolio that generally mirrors a securities index and will distribute the dividends and capital gains that are generated in the portfolio. In addition, since they are considered shares of stock and trade in the secondary market, most are marginable. Some mutual funds are structured to mirror an index; however, mutual fund shares are considered new issues and not initially marginable. ETNs are debt instruments that are structured to provide the return on a wide array of investments, but they don't purchase those securities for their portfolios. ADRs are depository receipts for foreign equities that are trading in U.S. markets.
Which of the following statements BEST describes exchange-traded notes (ETNs)? A) ETNs are debt instruments linked to the performance of a commodity, currency, or index B) ETNs are equity securities that pay a large dividend C) ETNs are mutual funds that invest in debt instruments D) ETNs are equity securities that represent ownership of a securities exchange
A) ETNs are debt instruments linked to the performance of a commodity, currency, or index Exchange-traded notes (ETNs) are a type of unsecured debt security. This type of debt security differs from other types of fixed-income securities since ETN returns are linked to the performance of a commodity, currency, or index minus applicable fees. Similar to ETFs, ETNs are traded on an exchange, such as the NYSE, and may be purchased on margin or sold short. Investors may also choose to hold the debt security until maturity.
Which of the following statements concerning ETFs is TRUE? A) These funds are priced once per day. B) These funds' values may fluctuate throughout the trading day. C) Managers of these funds tend to trade individual portfolio positions frequently. D) These funds tend to have very high portfolio turnover.
B) These funds' values may fluctuate throughout the trading day. Exchange-traded funds (ETFs) are investments that resemble unit investment trusts (UITs). A fixed portfolio is constructed either to track a specific index (such as the S&P 500) or a given market segment (such as gold or semiconductors). An ETF's portfolio typically remains constant unless there is a change to the underlying index or one of the individual investments within the fund is affected by a corporate action such as a sale or spin-off. ETFs are normally listed on NASDAQ or a traditional exchange and may fluctuate in price throughout the day as a regular stock would. They have a bid and ask as opposed to the NAV and POP found in mutual funds investments. Commissions are paid when trading ETFs as opposed to sales charges when purchasing mutual funds.
In what way is an actively managed exchange-traded fund (ETF) similar to an actively managed mutual fund?
Both offer interest in a larger pool of investments than investor-created portfolios Both ETFs and mutual funds offer investors a larger pool of investments than they could buy themselves (i.e., diversification). Actively managed portfolios attempt to provide returns that exceed the return of the overall market (e.g., S&P 500). Often, ETFs and mutual funds that have an active strategy will have higher expense ratios due to the fact that they have higher management fees than funds that are passively managed (e.g., index funds). Only mutual fund (open-end) share purchases and sales are based on at the NAV.
Which of the following may be subject to a capital call? A) Mutual funds B) ETFs C) DPPs D) ETNs
C) DPPs In some cases, DPP investors may be required to contribute additional capital (i.e., they may be subject to a capital call). Failure to meet the call could result in the investors forfeiting their initial interest.
If the credit rating of an issuer is lowered, which investment will lose the most value? A) Mutual funds B) Unit investment trusts (UITs) C) Exchange-traded notes (ETNs) D) Exchange-traded funds (ETFs)
C) Exchange-traded notes (ETNs) Although exchange-traded notes (ETNs) are a type of unsecured bond, their rate of return tracks an index. If the issuer of an ETN is unable to pay its investors, the investors don't have claim to any collateral and are general creditors. In other words, ETN investors are exposed to both credit risk and market risk. All of the other products represent ownership in a portfolio, rather than an unsecured bond, and don't have the same degree of credit risk as an ETN.
Which of the following is NOT a benefit of investing in a real estate investment trust (REIT)? A) Stable dividend income B) Liquidity C) Passive losses D) Diversification
C) Passive losses Unlike DPPs, real estate investment trusts (REITs) do not generate passive losses. REITs offer investors stable dividends based on the income being produced by owning a diversified portfolio of properties and/or mortgages. Most REITs trade on an exchange and offer investors liquidity. Since investors typically purchase REITs for their high dividend yield, if interest rates increase, the value of their shares will usually decrease as other newly issued income-earning securities become more attractive.
Which of the following statements concerning hedge funds is TRUE? A) These investments are highly liquid. B) These investments must be registered with the SEC. C) These investments are typically sold to accredited investors. D) These investments may charge a maximum load of 8 1/2 %.
C) These investments are typically sold to accredited investors. Hedge funds are typically sold to accredited investors. As a product, hedge funds can be extremely risky and illiquid.
What tax advantage is available with a real estate investments trust (REIT) investment? A) Distributions are taxed at the same 20% rate as corporate dividends. B) Everything an investor receives is taxed at the preferential long-term capital gains rate. C) All of the income is taxed at the corporate tax rate which is often lower than the highest tax rate assessed on an individual's ordinary income. D) If 90% of the income is distributed, only the shareholders pay taxes, thereby avoiding corporate taxes.
D) If 90% of the income is distributed, only the shareholders pay taxes, thereby avoiding corporate taxes. REITs are not taxed on their income if they distribute 90% of their investment income to their investors. Investors are taxed on the income they receive at their ordinary income rate, not the 20% dividend tax rate. A REIT largely avoids paying taxes (i.e., pass-through) which means that it's typically better for investors than dividends received from a corporation. Corporate dividends are taxed at the corporate rate and then at the dividend rate of 20% (i.e., double taxed).
Which of the following often provides capital to start-up businesses?
Private equity funds often provide capital to start-up businesses.
