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Question 1 of 10
1. Question
Which of the following statements is true regarding pooled investments?
Correct
Pooled investments
Pooled investments, such as unit investment trusts (UITs) and mutual funds are funds to which more than one investor contributes funds for the purpose of holding them as a group. This is done so each of the investors may have access to benefits to which they may not have had access individually. Pooled investments also create economies of scale which in turn lower an individual’s administrative costs (such as trading costs) and allow for greater diversification and benefit from professional money managers. Pooled investments also spread the risk over the pool of investors. The major drawback to pooled investments is related to the large pool of investors in regard to capital gains. The capital gains earned on the pooled funds are spread evenly over the pool, regardless of the tenure of the participant.Incorrect
Pooled investments
Pooled investments, such as unit investment trusts (UITs) and mutual funds are funds to which more than one investor contributes funds for the purpose of holding them as a group. This is done so each of the investors may have access to benefits to which they may not have had access individually. Pooled investments also create economies of scale which in turn lower an individual’s administrative costs (such as trading costs) and allow for greater diversification and benefit from professional money managers. Pooled investments also spread the risk over the pool of investors. The major drawback to pooled investments is related to the large pool of investors in regard to capital gains. The capital gains earned on the pooled funds are spread evenly over the pool, regardless of the tenure of the participant. -
Question 2 of 10
2. Question
Which of the following statements is true regarding Options?
Correct
Options
Options contracts are contracts between two or more investors based on the right or requirement to buy or sell a certain security that underlies the contract. The most basic types of options are calls and puts. More advanced options contracts are some combination of the two surrounding a strike price. Options are used for many reasons. A covered call can produce risk-free income for a retiree, whereas an investor who wishes to speculate on the price of an investment may purchase a straddle. The retiree selling the covered call receives the premium paid for the call and experiences no risk associated with the income because he or she owns the underlying security. The value of a straddle is realized when the price of the security experiences large amounts of volatility in either direction.Incorrect
Options
Options contracts are contracts between two or more investors based on the right or requirement to buy or sell a certain security that underlies the contract. The most basic types of options are calls and puts. More advanced options contracts are some combination of the two surrounding a strike price. Options are used for many reasons. A covered call can produce risk-free income for a retiree, whereas an investor who wishes to speculate on the price of an investment may purchase a straddle. The retiree selling the covered call receives the premium paid for the call and experiences no risk associated with the income because he or she owns the underlying security. The value of a straddle is realized when the price of the security experiences large amounts of volatility in either direction. -
Question 3 of 10
3. Question
Which of the following statements is false regarding Futures?
Correct
Futures
Futures are contracts between two or more parties that require the purchaser to buy a commodity (or occasionally a financial instrument) in the future at a fixed price, and vice versa for the seller of the future. Futures differ from forward contracts in that forward contracts are based on the current price with future delivery. Some futures may be settled in cash, and others are settled when the commodities are delivered. Since a futures contract derives its value from the underlying commodity or financial instrument, it is considered to be a derivative security. Futures have multiple uses to investors. Some may use them speculatively (futures may be highly leveraged compared to equity markets) to bet that the price of a given commodity will be volatile, while others may use them to lock in a price and hedge against uncertainty.Incorrect
Futures
Futures are contracts between two or more parties that require the purchaser to buy a commodity (or occasionally a financial instrument) in the future at a fixed price, and vice versa for the seller of the future. Futures differ from forward contracts in that forward contracts are based on the current price with future delivery. Some futures may be settled in cash, and others are settled when the commodities are delivered. Since a futures contract derives its value from the underlying commodity or financial instrument, it is considered to be a derivative security. Futures have multiple uses to investors. Some may use them speculatively (futures may be highly leveraged compared to equity markets) to bet that the price of a given commodity will be volatile, while others may use them to lock in a price and hedge against uncertainty. -
Question 4 of 10
4. Question
Which of the following statements is true regarding Forward?
Correct
Forward
Forward contracts are contracts between two or more parties based on an underlying asset, usually a commodity. The contract obligates the buyer to pay the current price of the asset for delivery in the future, and obligates the seller to deliver the asset in the future regardless of the change in price. Forward contracts differ from futures in that futures contracts are settled in the future at the future price, where forward contracts are settled at current prices. The fact that the value of the forward contract is derived from the underlying asset makes it a derivative. Investors can use forward contracts to hedge against risk. If the future price of an asset is uncertain and the asset is not needed until the future, a forward contract can help eliminate the uncertainty of the future price.Incorrect
Forward
Forward contracts are contracts between two or more parties based on an underlying asset, usually a commodity. The contract obligates the buyer to pay the current price of the asset for delivery in the future, and obligates the seller to deliver the asset in the future regardless of the change in price. Forward contracts differ from futures in that futures contracts are settled in the future at the future price, where forward contracts are settled at current prices. The fact that the value of the forward contract is derived from the underlying asset makes it a derivative. Investors can use forward contracts to hedge against risk. If the future price of an asset is uncertain and the asset is not needed until the future, a forward contract can help eliminate the uncertainty of the future price. -
Question 5 of 10
5. Question
Which of the following statements is true regarding Exchange-traded notes (ETNs)?
Correct
ETNs
Exchange-traded notes (ETNs) are hybrid securities which serve as a mixture of bonds and exchange-traded funds (ETFs). As their name implies, they are traded on an exchange, although they also have a maturity date like bonds. But with ETNs, the repayment of principal at the maturity date is modified according to the day’s market index factor. (Further, the repayment is reduced by investing fees.) The value of an ETN, however, is not simply based on the market index, but also depends on the creditworthiness of the debtor company, since ETNs are unsecured debt instruments. Unlike ordinary bonds, ETNs do not have periodic coupon payments.Incorrect
ETNs
Exchange-traded notes (ETNs) are hybrid securities which serve as a mixture of bonds and exchange-traded funds (ETFs). As their name implies, they are traded on an exchange, although they also have a maturity date like bonds. But with ETNs, the repayment of principal at the maturity date is modified according to the day’s market index factor. (Further, the repayment is reduced by investing fees.) The value of an ETN, however, is not simply based on the market index, but also depends on the creditworthiness of the debtor company, since ETNs are unsecured debt instruments. Unlike ordinary bonds, ETNs do not have periodic coupon payments. -
Question 6 of 10
6. Question
Which of the following statements is true regarding derivative securities?
Correct
Derivative securities
Derivatives have multiple uses to investors and are useful across a broad range of investment goals. Derivatives may be used to produce income for retirees, hedge investments by locking in guaranteed sell prices, produce high returns through speculative bets on the volatility of an asset’s price, and many more useful activities. The costs associated with investing in derivatives are realized in the premiums paid to secure the contracts in which the investor desires to participate. The risks associated with investing in derivatives are as varied as the different types of derivatives, as each type of derivative carries with it risk inherent to the contract. In a covered call contract, the seller risks only being required to sell the asset underlying the contract, while the purchaser risks the premium paid for the contract in the event that the contract expires worthless.Incorrect
Derivative securities
Derivatives have multiple uses to investors and are useful across a broad range of investment goals. Derivatives may be used to produce income for retirees, hedge investments by locking in guaranteed sell prices, produce high returns through speculative bets on the volatility of an asset’s price, and many more useful activities. The costs associated with investing in derivatives are realized in the premiums paid to secure the contracts in which the investor desires to participate. The risks associated with investing in derivatives are as varied as the different types of derivatives, as each type of derivative carries with it risk inherent to the contract. In a covered call contract, the seller risks only being required to sell the asset underlying the contract, while the purchaser risks the premium paid for the contract in the event that the contract expires worthless. -
Question 7 of 10
7. Question
Which of the following statements is true regarding alternative investments?
Correct
Alternative investments
Alternative investments are defined as investments other than those that are considered traditional such as cash, bonds, and stocks. They are usually limited to sophisticated investors such as high-net-worth investors and institutional investors, although retail investors may access them via mutual funds. Retail investors may also access alternative investments by buying real estate and precious metals. Alternative investments, commonly referred to as “Alts,” are used for many reasons from hedging investments to speculative bets for large returns. Alternative investments are attractive because they have low correlation with equity and fixed-income markets. This provides the investor with a certain degree of stability during uncertain economic times.Incorrect
Alternative investments
Alternative investments are defined as investments other than those that are considered traditional such as cash, bonds, and stocks. They are usually limited to sophisticated investors such as high-net-worth investors and institutional investors, although retail investors may access them via mutual funds. Retail investors may also access alternative investments by buying real estate and precious metals. Alternative investments, commonly referred to as “Alts,” are used for many reasons from hedging investments to speculative bets for large returns. Alternative investments are attractive because they have low correlation with equity and fixed-income markets. This provides the investor with a certain degree of stability during uncertain economic times. -
Question 8 of 10
8. Question
Which of the following statements is false regarding variable annuities?
Correct
Variable annuities
Variable annuities are insurance products that guarantee a variable payout over the life of the contract. Unlike fixed annuities, the investor may decide in which markets their annuity premiums are invested. Although bond markets are available, investors generally choose to invest their premiums in equity markets, as their investments will have a better chance of keeping pace with inflation. Also unlike fixed annuities, the investor bears the market risk associated with the variable account balance. Since the annuity payments are based on the underlying account value, variable annuities have the possibility of providing higher annuity payments, but also present the risk of lower annuity payments. Sellers of variable annuities must be licensed by FINRA as well as by the state insurance department. Variable annuities are high-fee, high-commission products. Advisors must perform due diligence to be certain that they are suitable investments for the client.Incorrect
Variable annuities
Variable annuities are insurance products that guarantee a variable payout over the life of the contract. Unlike fixed annuities, the investor may decide in which markets their annuity premiums are invested. Although bond markets are available, investors generally choose to invest their premiums in equity markets, as their investments will have a better chance of keeping pace with inflation. Also unlike fixed annuities, the investor bears the market risk associated with the variable account balance. Since the annuity payments are based on the underlying account value, variable annuities have the possibility of providing higher annuity payments, but also present the risk of lower annuity payments. Sellers of variable annuities must be licensed by FINRA as well as by the state insurance department. Variable annuities are high-fee, high-commission products. Advisors must perform due diligence to be certain that they are suitable investments for the client. -
Question 9 of 10
9. Question
Which of the following statements is true regarding fixed annuities?
Correct
Fixed annuities
A fixed annuity is a contract between an investor and an insurance company in which the investor provides the insurance company with a premium or multiple premiums in exchange for regular annuity payments at some future date. The premium is guaranteed a fixed rate of return, thus putting the totality of market risk associated with the account on the insurance company. This is unlike variable annuities in which investors may choose investments to obtain a variable rate of return and thereby choose to bear the risk of the market. When the account is annuitized, the regular and fixed payments are calculated based on the account’s value and the investor’s life expectancy, and are paid to the investor, thereby providing a predictable stream of income during retirement. Additional options, usually referred to as riders, can extend the length of the payouts, but at added expense to the investor.Incorrect
Fixed annuities
A fixed annuity is a contract between an investor and an insurance company in which the investor provides the insurance company with a premium or multiple premiums in exchange for regular annuity payments at some future date. The premium is guaranteed a fixed rate of return, thus putting the totality of market risk associated with the account on the insurance company. This is unlike variable annuities in which investors may choose investments to obtain a variable rate of return and thereby choose to bear the risk of the market. When the account is annuitized, the regular and fixed payments are calculated based on the account’s value and the investor’s life expectancy, and are paid to the investor, thereby providing a predictable stream of income during retirement. Additional options, usually referred to as riders, can extend the length of the payouts, but at added expense to the investor. -
Question 10 of 10
10. Question
Which of the following statements is true regarding life insurance?
Correct
Life insurance
Life insurance is a contract between the investor and an insurance company in which the insurance company guarantees a payment upon the insured’s death to the investor’s beneficiary or beneficiaries in exchange for premiums received from the investor. Life insurance is designed to help the deceased’s beneficiaries (usually relatives or a business in which the insured was key to the businesses success) meet financial obligations or needs they may be unable to meet without the insured’s income. There are multiple types of life insurance products that are tailored to meet specific needs at different times in investors’ lives.Incorrect
Life insurance
Life insurance is a contract between the investor and an insurance company in which the insurance company guarantees a payment upon the insured’s death to the investor’s beneficiary or beneficiaries in exchange for premiums received from the investor. Life insurance is designed to help the deceased’s beneficiaries (usually relatives or a business in which the insured was key to the businesses success) meet financial obligations or needs they may be unable to meet without the insured’s income. There are multiple types of life insurance products that are tailored to meet specific needs at different times in investors’ lives.