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Question 1 of 10
1. Question
How is the net asset value of the UIT calculated?
Correct
The net asset value of the UIT is simply the total of all underlying securities divided by the number of units that are currently outstanding. However, unlike mutual funds, the growth of assets within Unit Investment Trusts experiences much less drag as a result of investment management fees that come along with more active management and hiring an adviser as well as taxes on the early sale of securities and higher portfolio turnover.
Incorrect
The net asset value of the UIT is simply the total of all underlying securities divided by the number of units that are currently outstanding. However, unlike mutual funds, the growth of assets within Unit Investment Trusts experiences much less drag as a result of investment management fees that come along with more active management and hiring an adviser as well as taxes on the early sale of securities and higher portfolio turnover.
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Question 2 of 10
2. Question
Which of the following statements is true regarding closed-end funds?
Correct
Closed-end funds, or closed-end companies, are one of three types of investment companies, in addition to open-end investment companies, or mutual funds, and unit investment trusts (UITs). Closed-end funds are distributed to the public through an initial public offering of a given number of shares, which are then traded in the secondary market. Due to the fact that these securities are traded in the secondary market and bought and sold between investors, the price paid for these securities may differ from the net asset value of the fund. Unlike mutual funds and unit investment trusts (UITs), sponsors of closed-end funds are not required to redeem investors’ shares. As a result, closed-end funds are also able to invest in much more illiquid securities.
Incorrect
Closed-end funds, or closed-end companies, are one of three types of investment companies, in addition to open-end investment companies, or mutual funds, and unit investment trusts (UITs). Closed-end funds are distributed to the public through an initial public offering of a given number of shares, which are then traded in the secondary market. Due to the fact that these securities are traded in the secondary market and bought and sold between investors, the price paid for these securities may differ from the net asset value of the fund. Unlike mutual funds and unit investment trusts (UITs), sponsors of closed-end funds are not required to redeem investors’ shares. As a result, closed-end funds are also able to invest in much more illiquid securities.
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Question 3 of 10
3. Question
What does an insurance company separate account mean?
Correct
As provided in Section 2(a)(37) of the Investment Company Act of 1940, an insurance company separate account means “an account established and maintained by an insurance company pursuant to the laws of any State or territory of the United States, or of Canada or any province thereof, under which income, gains and losses, whether or not realized, from assets allocated to such account, are, in accordance with the applicable contract, credited to or charged against such account without regard to other income, gains or losses of the insurance company.
Incorrect
As provided in Section 2(a)(37) of the Investment Company Act of 1940, an insurance company separate account means “an account established and maintained by an insurance company pursuant to the laws of any State or territory of the United States, or of Canada or any province thereof, under which income, gains and losses, whether or not realized, from assets allocated to such account, are, in accordance with the applicable contract, credited to or charged against such account without regard to other income, gains or losses of the insurance company.
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Question 4 of 10
4. Question
What is the importance of a comprehensive understanding of the risks of the investment?
Correct
The 10 types of investment risk are business risk, credit risk, interest rate risk, purchasing power risk, liquidity risk, reinvestment risk, taxability risk, market risk, social/political risk, and currency exchange risk. When evaluating potential investments, each of these risks must be considered in order to determine the comprehensive level of risk of the investment. Without a comprehensive understanding of the risks of the investment, an investor or adviser cannot ensure that any investment recommendation is truly suitable.
Incorrect
The 10 types of investment risk are business risk, credit risk, interest rate risk, purchasing power risk, liquidity risk, reinvestment risk, taxability risk, market risk, social/political risk, and currency exchange risk. When evaluating potential investments, each of these risks must be considered in order to determine the comprehensive level of risk of the investment. Without a comprehensive understanding of the risks of the investment, an investor or adviser cannot ensure that any investment recommendation is truly suitable.
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Question 5 of 10
5. Question
Which of the following statements is true regarding business risk?
Correct
Business risk is defined as the possibility that a company’s financial performance could have a negative impact on the returns to the company’s investors. Business risk can be influenced by a number of factors, including sales/revenue that don’t meet expectations, shrinking margins, or increased pressure from competitors.
Incorrect
Business risk is defined as the possibility that a company’s financial performance could have a negative impact on the returns to the company’s investors. Business risk can be influenced by a number of factors, including sales/revenue that don’t meet expectations, shrinking margins, or increased pressure from competitors.
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Question 6 of 10
6. Question
Which of the following statements is true regarding interest rate risk?
Correct
Interest rate risk is defined as the possibility that a change in market interest rates or in the term structure of interest rates or yield curve could have a negative impact on an investor’s returns. Like credit risk, interest rate risk is primarily associated with fixed income investments. As market interest rates rise, the price of a fixed income security will fall because the investor’s preference, at equal prices, would be to receive the security with the higher coupon rate.
Incorrect
Interest rate risk is defined as the possibility that a change in market interest rates or in the term structure of interest rates or yield curve could have a negative impact on an investor’s returns. Like credit risk, interest rate risk is primarily associated with fixed income investments. As market interest rates rise, the price of a fixed income security will fall because the investor’s preference, at equal prices, would be to receive the security with the higher coupon rate.
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Question 7 of 10
7. Question
Which of the following statements is true regarding liquidity risk?
Correct
Liquidity risk is defined as the possibility that the lack of liquidity within a security can have a negative impact for investors. One characteristic common to low liquidity is a wide spread between bid and ask prices. As investors who are forced to sell their positions receive lower prices due to the spread, those investors who are still holding their positions now see lower valuations. Liquidity risk is more relevant to equity investors than to fixed income investors, as fixed income investors are at least entitled to receive coupon payments and principal repayment at the scheduled maturity of the security.
Incorrect
Liquidity risk is defined as the possibility that the lack of liquidity within a security can have a negative impact for investors. One characteristic common to low liquidity is a wide spread between bid and ask prices. As investors who are forced to sell their positions receive lower prices due to the spread, those investors who are still holding their positions now see lower valuations. Liquidity risk is more relevant to equity investors than to fixed income investors, as fixed income investors are at least entitled to receive coupon payments and principal repayment at the scheduled maturity of the security.
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Question 8 of 10
8. Question
What is the definition of reinvestment risk?
Correct
Reinvestment risk is defined as the possibility that investors who receive cash flows from securities will be forced to reinvest those cash flows into securities with lower interest rates or to accept additional risk in order to receive an equivalent rate.
Incorrect
Reinvestment risk is defined as the possibility that investors who receive cash flows from securities will be forced to reinvest those cash flows into securities with lower interest rates or to accept additional risk in order to receive an equivalent rate.
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Question 9 of 10
9. Question
Which of the following statements is true regarding taxability risk?
Correct
Taxability risk is defined as the possibility that an investment’s return will be negatively impacted because of a change in the tax treatment of the investment’s earnings. Returns on equity investments are impacted by prevailing tax rates on dividends and short- and long-term capital gains, while fixed income coupons may be taxable or may be tax-exempt, depending on the issuer. An equity investor could be subject to taxability risk if he purchased a small-cap growth security that he plans to hold for five years. The expected pre-tax return on the security is 10% and the long-term capital gains tax rate is 18%, so the expected after-tax return is 8.2%.
Incorrect
Taxability risk is defined as the possibility that an investment’s return will be negatively impacted because of a change in the tax treatment of the investment’s earnings. Returns on equity investments are impacted by prevailing tax rates on dividends and short- and long-term capital gains, while fixed income coupons may be taxable or may be tax-exempt, depending on the issuer. An equity investor could be subject to taxability risk if he purchased a small-cap growth security that he plans to hold for five years. The expected pre-tax return on the security is 10% and the long-term capital gains tax rate is 18%, so the expected after-tax return is 8.2%.
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Question 10 of 10
10. Question
Which of the following is one of the things impacted by social/political risk?
Correct
Social/political risk is defined as the possibility that changes in the governmental structure of a country or an unsettling of the political landscape could negatively impact the returns on both equity and fixed income investments. Typically, both equity and fixed income investments would be impacted similarly by social/political risk.
Incorrect
Social/political risk is defined as the possibility that changes in the governmental structure of a country or an unsettling of the political landscape could negatively impact the returns on both equity and fixed income investments. Typically, both equity and fixed income investments would be impacted similarly by social/political risk.