Unit 5 - Alternative Investments and Other Assets

If you overheard an analyst referring to an investment's indicative value, the discussion would MOST likely be about a) TIPS b) REITs c) ETNs d) ETFs

c

Your client who owns a DPP that generated a $10,000 passive loss for the year could a) only deduct the passive loss against passive income b) deduct $3,000 against ordinary income and carry over the rest c) deduct $10,000 against ordinary income d) deduct $10,000 against capital gains

a. Passive losses, such as those generated by limited partnership investments (DPPs) are only deductible against passive income.

Active real estate investment would include all of the following EXCEPT a) buy, renovate, and sell b) build new and sell c) buy a RELP d) buy, hold, and rent

c. A RELP is a real estate limited partnership DPP and as a limited partner, legally, the investor can only take a passive role

The price of which of the following commodities is most likely to be impacted by weather? a) gold b) lead c) livestock d) orange juice

d

A 3x leveraged fund priced at $42 tracks an index that is up 2% one day and then down 3% on the next day. What should this fund be approximately priced at following these two volatile days? a) $45.86 b) $41.55 c) $43.18 d) 40.50

d. (42*0.06 = 2.52 + 42 = 44.52) 44.52 * 0.09 = 4.0068 44.52 - 4.0068 = 40.5132

Your customer, age 68, is in reasonably good health. After the sale of her business, the need for maintaining a $1 million whole life insurance policy is questionable. Which of the following would be a reasonable recommendation if the decision were made that the policy is no longer needed? a) engage in a life settlement sale b) engage in a viatical sale c) borrow the maximum cash value and invest it in an index ETF d) terminate the policy, take the cash proceeds, and begin writing uncovered call options

a

All of the following are characteristics associated with equity-linked notes (ELNs) EXCEPT a) they are equity securities b) they are considered an alternative pooled investment c) they have final payments at maturity linked to the return of an underlying stock or basket of stocks d) they are considered to be nonconventional structured investments

a. These are debt instruments. They have a partial fixed return as well as a final payment linked to the performance of a single stock or equity index. Some are exchange-traded, while others trade OTC. FINRA considers ELNs to be nonconventional structured interests and has expressed concerns investors don't understand their risks.

A client with limited assets seeking additional income in retirement would probably find which of the following investment choices to be the LEAST suitable? a) ETNs b) Treasury Bonds c) Insured bank CDs d) ETFs

a. This question describes an individual with a low-risk tolerance. Because ETNs are a debt security backed Soley by a single issuer while an ETF based on a specific index of debt securities represent a large group of issuers, ETNs are only suitable for those who can understand and take the risks involved

One type of alternative investment considered to be a pooled investment vehicle is the exchange-traded note. Exchange-traded notes (ETNs) are which of these? I. Unsecured debt securities II. Unsecured equity securities III. Issued by financial institutions, such as banks IV. Insured by the FDIC a) I and IV b) I and III c) II and III d) II and IV

b

Among the differences between an investment in a limited partnership offering an in a corporation is that a) only corporations are organized to run a business b) limited partners take a more active role in the management of the enterprise than do stockholders of a corporation c) only corporations issue securities d) limited partnership offerings do not pay dividends; corporations do

d. limited partnerships issue units, representing the limited partner's interest in the venture.

A 75-year old customer asks if it is possible to sell his $500,000 variable life insurance policy to a party other than the insurance company that issued the policy. If a sale occurs, known as a life settlement, which of the following would be a violation of industry rules a) requiring the customer to relinquish all ownership rights to the policy b) Quoting the price using an exclusive buyer that handles all the firm's settlements c) disclosing that the buyer becomes responsible for all premiums while the insured is living d) not requiring the insured to pass a physical exam before the sale

b. Because of the limited secondary market for life settlements, any firm that engages in these transactions should obtain several bids to ensure the customer receives a fair price for the policy

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 two years of drilling without success, the project was foreclosed with outstanding debt of $4 million. Your client is liable to the partnership's creditors for a) $150,000 b) $0 c) $400,000 d) $250,000

b. One of the benefits of being a limited partner is that the most you can lose is your investment. Just as it would for a stockholder in a corporation, the concept of limited liability applies. You can lose your entire investment, but you have no liability for the debts of the business.

You have a client who sold her $5 million whole life insurance policy through a life settlement broker. If she dies two years later, a) the insurance broker must return all commissions to the insurance company b) her estate can invoke the right of rescission and receive the policy proceeds minus the sale proceeds c) the insurance company is not obligated to pay the death benefit because she no longer owns the policy d) the new owner receives the $5 million death benefit

d. a life settlement contract involves the sale of a life insurance policy to a party other than the insured. In exchange for the payment, the new owner is entitled to the death benefit when the seller passes away. The right of rescission applies to illegal securities sales; this is not a security, nor has any illegal activity been described