SIE Chapter 5 missed checkpoint questions

An investor considering the differences between purchasing open-end investment company shares or ETFs with a similar objective should understand which of these? 1. Each time an investor purchases and sells ETFs there is a commission. 2. The operating expense ratio for an ETF is generally very high because they usually track indexes such as the S&P 500. 3. It is possible that an investor liquidating ETF holdings will receive less than the NAV per share. 4. The margin requirements to purchase an ETF are higher than that for an open-end investment company.

1 and 3 ETFs pricing is based upon supply and demand making it possible to receive less than NAV

Which of these trading strategies are employed by hedge funds but are generally prohibited to mutual funds? 1. The act of limiting investments to a narrow group of securities 2. The use of borrowed money to purchase portfolio securities 3. The act of taking long positions in speculative stocks 4. The act of taking short positions in NYSE listed stocks

2 and 4 Under most conditions, mutual funds are prohibited from purchasing securities on margin (i.e., using leverage—borrowed money) and from selling short.

Identify two trading strategies that a hedge fund could employ in its portfolio but a mutual fund cannot. 1. Limiting investments to a narrow group of securities within one industry 2. Trading on margin to purchase portfolio securities 3. Purchasing speculative or low rated securities 4. Selling short stocks

2 and 4 mutual funds are prohibited from purchasing securities on margin and selling securities short. Both strategies, however, are commonly employed by hedge funds.

Which of the following securities are nonexempt from registration under the Securities Act of 1933? A) Real estate investment trusts (REITs) and corporate equity issues B) Municipal securities and U.S. government agency issues C) Corporate debt issues and U.S. government agency issues D) U.S. government Treasury issues and REITs Explanation

A) Real estate investment trusts (REITs) and corporate equity issues REITs are nonexempt securities subject to the registration and new issue disclosure provisions of the Securities Act of 1933

A feature of direct participation programs is A) flow through of profits and losses of the partnership to the individual limited partners. B) the ability of any partner, limited or general, to participate in the running of the partnership. C) general partners directly participating in the day-to-day management of the partnership. D) the ability for each partner to have her vote flow through to the general partner.

A) flow through of profits and losses of the partnership to the individual limited partners. Understanding the flow-through concept is critical with DPPs. Only DPPs allow flow through of losses.

All of these are true for an Achieving a Better Life Experience account except A) that the account must be opened before the beneficiary turns 26. B) that the onset of the disability must have occurred before the owner turns 26. C) that the income is tax-free. D) that the account owner and beneficiary must be disabled.

A) that the account must be opened before the beneficiary turns 26.

A hedge fund portfolio has been characterized as being highly leveraged. This means that A) there is substantial borrowing or purchasing on margin. B) commodities and currencies are included in the portfolio. C) derivative products such as options are utilized. D) there are substantial investments in international markets.

A) there is substantial borrowing or purchasing on margin. being highly leveraged means borrowing to purchase. Borrowing to purchase securities is typically known as buying on margin.

On a long put, when the premium equals the intrinsic value, the put is A) at parity. B) out of the money. C) past expiration. D) at its breakeven point.

A) at parity

At expiration, for those who trade put options, which of the following is true? A) Put buyers want the contract to be in the money. B) Put writers want the contract to be in the money. C) Put buyers want the contract to be out of the money. D) Put writers want the contract to be trading with intrinsic value.

A) put buyers want the contract to be in the money At expiration, put buyers (like call buyers) want the contracts to have intrinsic value and, therefore, to be in the mone

Which of the following is true of a European option? A) It will exercise at expiration. B) It may only be exercised on the last day of trading before expiration. C) It may be exercised in the last week before expiration. D) It may be exercised at any time.

B) It may only be exercised on the last day of trading before expiration. European contracts may only be exercised on the last day the contract trades before expiration. American-style options may be exercised by the owners at any time. American options are much more common.

Last year Brownstone Properties, LP distributed $200 per unit to investors and reported a $500 business loss per unit on the K-1. For tax purposes the investors received A) $200 per unit of passive income. B) a $500 per unit passive loss. C) a $500 reduction in ordinary income. D) a net $300 loss.

B) a $500 per unit passive loss. Income and losses in an LP are always treated as passive and are reported to the investor via the K-1. The tax results for the year are included in that document.

All of the following are characteristics of 529 Savings Plans except A) contributions grow tax deferred. B) contributions are federally tax deductible. C) withdrawals are tax free if used for qualified education expenses. D) contributions may be state deductible.

B) contributions are federally tax deductible. Contributions of 529 Savings Plans are not federally tax deductible.

A customer writes (sells) a call. This customer will realize the maximum gain if A) the price of the underlying stock rises. B) the option contract expires without being exercised. C) the price of the option contract rises. D) the customer is assigned on the contract.

B) the option contract expires without being exercised. If the contract is not exercised by the owner, the writer keeps the premium

Which of the following pairs of options contracts is not in the money if the strike price is 40 and the market price is 30? A) Short call and long put B) Long call and short call C) Short call and short put D) Long call and long put

B) long call and short call All calls are in the money when the market price is above the strike price. Therefore, calls with a strike price of 40 when the market price is 30 are out of the money.

An investor buys 1 DWQ May 70 call at 2, giving the investor the right to buy 100 shares of DWQ at $70 per share. All the specifications of the transaction are set or standardized by the Options Clearing Corporation (OCC) except A) exercise price of 70. B) premium of 2. C) contract size of 100 shares. D) expiration date in May.

B) premium of 2 The OCC sets standard exercise prices and expiration dates for all listed options, but the options premiums that buyers pay are determined by the market.

What method is used to assign exercise notices to broker-dealers with short positions by Options Clearing Corporation (OCC)? A) First in, first out (FIFO) basis B) Random-selection basis C) Last in, first out (LIFO) basis D) Any method considered fair and reasonable

B) random-selection basis

The buyer of an option contract can be known as all of the following except A) holder. B) writer. C) long party. D) owner.

B) writer writers are who sell the contract

If a customer bought puts to open, which of the following transactions would be allowed if the options agreement was not returned signed within 15 days? A) Buy calls to close B) Sell puts to open C) Sell puts to close D) Sell calls to open

C) Sell puts to close If the agreement is not returned signed in 15 days, only closing transactions to offset those positions already open would be allowed.

Exchange-traded funds (ETFs) A) pass on capital gains to investors annually but have low expense ratios. B) pass on capital gains to investors annually and have high expense ratios. C) can be bought and sold throughout the trading day and have low expense ratios. D) can be bought and sold throughout the trading day and have high expense ratios.

C) can be bought and sold throughout the trading day and have low expense ratios. they have low operating costs and expense ratios and can be bought and sold throughout the trading day.

What is the intrinsic value of an XYZ 40 call bought at a premium of 3 when the current market value of XYZ is at 30? A) -$10 B) -$7 C) $0 D) $7

C) 0 Intrinsic value is the amount that a contract is in the money. The premium of the contract is not a factor. All calls are in the money when the market value of the stock is above the strike price.

Who are the typical investors in a local government investment pool? A) Income investors B) Aggressive investors C) Municipal governments D) Federal government agencies

C) Municipal governments Local government investment pools (LGIPs) are designed as a money market type of security for use by municipal governments.

Investors in hedge funds are generally what type of investor? A) Equity investors B) Retail investors C) Accredited investors D) Income investors

C) accredited investors Although hedge funds are unregulated (no Securities and Exchange Commission registration is required), there are laws requiring that those who purchase shares of hedge funds be accredited investors. That is, they must meet minimum annual income and net worth criteria, as well as have considerable investment knowledge.

Put buyers are A) both bullish and bearish. B) neither bullish nor bearish. C) bearish. D) bullish.

C) bearish Put buyers have the right to sell the stock. Being in a position to sell the stock makes them bearish.

An investor who is long MES equity put options is A) wants MES stock to remain fixed at the current price. B) bullish on MES stock. C) bearish on MES stock. D) is bearish on the put price but bullish on MES stock.

C) bearish on MES stock Those who buy equity put options have the right to sell the underlying stock, in this case MES stock>bearish

An exchange-traded note is what type of security? A) Money market security B) Equity security C) Debt security D) Market place security

C) debt security note=debt security

Limited partnerships sold through private placements involve A) a large group of investors, each contributing a small sum. B) a small group of investors, each contributing a small sum. C) a small group of investors, each contributing a large sum. D) a large group of investors, each contributing a large sum.

C) small group of investors, each contributing a large sum

Which of the following incur a fiduciary responsibility in a limited partnership? A) The limited partners B) Both the general and the limited partners C) The general partners D) Each individual partnership investor

C) the general partners

The maximum loss on a long put is A) the strike price. B) strike price + premium. C) the premium. D) strike price - premium.

C) the premium (The amount paid for the option)

Your customer has one position in her account and it poses an unlimited loss potential. Which of the following is it? A) Long call B) Long put C) Short put D) Short call

D) Short call short calls carry unlimited risk, they are bearish

Hedge funds A) are highly regulated, starting with the requirement to be registered with the SEC. B) are nonregulated but still require SEC registration. C) are regulated under the Investment Company Act of 1940 with no SEC registration required. D) are not regulated under the Investment Company Act and no Securities and Exchange Commission (SEC) registration is required.

D) are not regulated under the Investment Company Act and no Securities and Exchange Commission (SEC) registration is required.

edro dislikes Seabird Coffee and thinks the company's stock is overvalued. He is currently short 1,000 shares of the company. He is concerned with the potentially unlimited risk he is exposed to and would like to use options to hedge that risk. His best option position would be A) sell 10 Seabird Coffee calls. B) buy 10 OEX (S&P 100 index) calls. C) buy 10 Seabird Coffee puts. D) buy 10 Seabird Coffee calls.

D) buy 10 Seabird Coffee calls. Long calls provide the best protection against a short stock position

All of the following terms and phrases are associated with the sell side of an option contract except A) receives the premium. B) writes the contract. C) has an obligation. D) has a right.

D) has a right. Buyer has a right to exercise the contract

An August 15 call is written at 4. The call expires without being exercised by the owner. The writer of the call A) keeps the $150 received when the call was written. B) loses the $150 paid when the call was written. C) loses the $400 paid when the call was written. D) keeps the $400 received when the call was written.

D) keeps the $400 received when the call was written.

At expiration CDT stock is trading at 43. A January 40 put would be A) recognized as expiring in the money. B) expiring right at the money. C) noted as having 3 points of intrinsic value. D) left to expire unexercised.

D) left to expire unexercised. At expiration if the strike price of a put (40) is below the current market value of the underlying stock (43), the put contract is out of the money, has no intrinsic value and therefore would expire without being exercised.

An investor is long 1 May 35 call at 5. The 35 in this contract represents A) the premium, the price the investor can purchase stock at. B) the strike price, the price the investor has paid for the contract. C) the premium, the price the investor has paid for the contract. D) the strike price, the price the investor can purchase stock at.

D) the strike price, the price the investor can purchase stock at.

Your customer, Ford, wrote 5 SPX (S&P 500 equity index) 2990 call options. Today, Tuesday, he received word that his options have been exercised. The SPX closed at 3000. He will have to deliver A) cash in two days. B) 500 shares tomorrow. C) 500 shares in two days. D) cash tomorrow.

D) cash tomorrow This is an exercise of an index option. This exercise will require the seller of the option, to deliver cash equal to the in-the-money amount, on the next business day.

All of these are risks associated with limited partnerships except A) liquidity risk. B) business risk. C) audit and recapture risk. D) limited liability risk.

D) limited liability risk limited liability is a benefit

How often may funds be rolled over from one state's Section 529 plan to another's? A) As often as necessary B) No more than twice per calendar year C) Once per semester D) Once every 12 months

D) once every 12 months