SIE unit 5 - Other Investment Vehicles

Partners in direct participation leasing programs can receive write-offs for all the following except A) depletion. B) operating expenses. C) interest expenses. D) depreciation.

A) depletion. Explanation: Write-offs (deductions) associated with leasing programs are those taken for operating expenses, depreciation of the equipment owned and leased, and interest costs on the loans to purchase the equipment. Depletion, however, is a deduction associated with natural resources programs, such as oil and gas.

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 A) I and IV B) II and IV C) I and III D) II and III

B) II and IV Explanation: While there can be limited and rare exceptions, 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 is true regarding general partners (GPs) in a limited partnership? A) They may compete with the partnership. B) They should participate in the day-to-day management of the partnership. C) Their management decisions are not legally binding on the partnership. D) They may borrow money from the partnership.

B) They should participate in the day-to-day management of the partnership. Explanation: General partners have a fiduciary responsibility to manage the partnership in the best interest of the investors (partners). In doing so, they make decisions regarding all day-to-day management of the business. These decisions are, therefore, legally binding on the business. GPs may not, however, borrow money from or compete with the partnership.

When a limited partnership is liquidated (dissolved), the priority of payments to settle accounts are made from first to last in which order? 1.General partners 2.Limited partners 3.General creditors 4.Secured creditors A) I, II, III, IV B) IV, III, I, II C) IV, III, II, I D) I, IV, III, II

C) IV, III, II, I Explanation: Creditors are paid first in a liquidation, with priority given to the secured lenders before general lenders; limited partners are paid first of the partners, with general partners last to be paid.

For a real estate DPP, which of the following is true? A) Income will come from appreciation of the portfolio properties. B) Neither income nor capital growth would come from rents received. C) Income can be derived from rents received for the properties. D) Capital growth can be derived from rents received.

C) Income can be derived from rents received for the properties. Explanation: For real estate DPPs, both income and capital growth are possible. Income comes from the property rents received, and capital growth would come from the appreciation of the properties.

Which of the following are potential benefits associated with a real estate direct participation program? A) Intangible costs B) Dividends and interest C) Tax deductions and credits D) Depletion allowances

C) Tax deductions and credits Explanation: For real estate programs, both deductions (from mortgage interest expenses and depreciation) and credits (for certain types of programs) are potential benefits. Depletion and intangible costs are associated with natural resource programs such as oil and gas, and DDPs do not pay dividends or interest.

In explaining hedge funds to an investor, a registered representative might correctly characterize them as utilizing A) basic and conservative investment strategies entailing low risk. B) basic investment strategies for the purpose of mitigating risk. C) advanced and complicated strategies entailing high risk. D) advanced and complicated strategies for the purpose of mitigating risk.

C) advanced and complicated strategies entailing high risk. Explanation: Hedge fund portfolios are aggressively managed in an attempt to achieve high returns. To do so they utilize advanced and complicated strategies generally associated with high risk.

Section 529 plans are considered municipal fund securities. They must therefore be sold by A) prospectus. B) investment letter. C) offering circular. D) security memo.

C) offering circular. Explanation: Municipal bonds are sold by offering circular, a document similar to a prospectus used in the sale of municipal securities. Because Section 529 plans are state sponsored, they must be sold by offering circular.

All of the following would be advantages of a limited partner in a DPP except A) deductions for business expenses. B) cash distributions of capital gains. C) participate in the management of the business. D) cash distributions of earning.

C) participate in the management of the business Explanation: Limited partners who take on a management role lose their limited liability protection

Which of the following is true for exchange-traded funds (ETFs)? A) The SEC has classified them as mutual funds, and they have operating costs and expenses that are higher than most mutual funds. B) The SEC has classified them as mutual funds, and they have operating costs and expenses that are lower than most mutual funds. C) The SEC has classified them as a type of open-end fund, and they have operating costs and expenses that are higher than most mutual funds. D) The Securities and Exchange Commission (SEC) has classified them as a type of open-end fund, and they have operating costs and expenses that are lower than most mutual funds.

D) The Securities and Exchange Commission (SEC) has classified them as a type of open-end fund, and they have operating costs and expenses that are lower than most mutual funds. Explanation: The SEC has classified ETFs as a type of open-end fund but not a mutual fund. ETFs traditionally have operating costs and expenses that are lower than most mutual funds because they do not have to purchase and sell holdings within the portfolio to accommodate investors purchasing shares or redeeming shares, as is the case with mutual funds.

In a limited partnership, which of the following best describes who is responsible for tax consequences of the business? A) The business B) The general partners C) The limited partners D) The investors

D) The investors Explanation: All tax consequences of the business flow through proportionality to the investors. All partners will have some tax impact, not just the general or just the limited partners.

An allowable deduction to compensate for decreasing natural resources in an oil and gas DPP are known as A) deductions for IDCs. B) depreciation deductions. C) tax credits. D) depletion allowances.

D) depletion allowances. Explanation: Tax deductions that compensate an oil and gas program for the decreasing supply of the resource after it is taken out of the ground and sold are known as depletion allowances.

Regarding the decision to dissolve a LP before its scheduled predetermined dissolution date, it would need to be A) voted on by the general partner(s) only. B) made by the general partner with the largest capital contribution with no vote required. C) ratified by the IRS because of the tax implications to dissolve earlier than planned. D) voted on by the limited partners holding a majority interest.

D) voted on by the limited partners holding a majority interest. Explanation: In instances where a decision to dissolve a limited partnership before its predetermined date is made, an affirmative vote to do so must be taken by the limited partners.