M9A Quiz Mock Exam 4 CMFAS

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  • 1/50 Questions

    (C2/S5.4) 1 One of the ways to reduce concentration risk is __________.

    • Increase risk tolerance
    • Liquidity
    • Diversification
    • Management
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About This Quiz

This mock exam for m9a CMFAS consists of questions designed to assess understanding in financial instruments, structured products, and investment strategies. Key topics include risk diversification, structured product management, and investment securities.

M9A Quiz Mock Exam 4 CMFAS - Quiz

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  • 2. 

    (C1/S2) 2 A structured product manager purchased a zero-coupon bond at $20 for every $100 invested in the structured product. The structured product aims to provide a return of the capital portion to investors at maturity. Assuming the zero-coupon bond matures at the same time as the structured product, what must the maturity value of the zero-coupon be in order to return the principal to the investor?

    • $20

    • $80

    • $100

    • $120

    Correct Answer
    A. $100
    Explanation
    The maturity value of the zero-coupon bond must be $100 in order to return the principal to the investor. Since the structured product manager purchased the bond at $20 for every $100 invested, the maturity value of the bond needs to be equal to the amount invested, which is $100.

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  • 3. 

    (C1/S3.3) 3 A __________ comes with conditional downside protection which depends on a pre-determined barrier.

    • Contract for differences

    • Tracker certificate

    • Discount certificate

    • Bonus certificate

    Correct Answer
    A. Bonus certificate
    Explanation
    A bonus certificate is a financial instrument that offers conditional downside protection, meaning that the investor's losses are limited if the underlying asset falls below a pre-determined barrier. This makes it an attractive investment option for those who want to limit their risk exposure while still having the potential for upside gains.

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  • 4. 

    (C1/S3) 4 A structured note which is an intermediate term debt security is __________.

    • Interest rate-linked

    • Equity-linked

    • Hybrid-linked

    • Market-linked

    Correct Answer
    A. Hybrid-linked
    Explanation
    A structured note is a type of debt security that combines features of different financial instruments. It is designed to provide investors with exposure to a specific market or asset class. In this case, the structured note mentioned in the question is described as "intermediate term," indicating that it has a maturity period between short-term and long-term debt. The term "hybrid-linked" suggests that the note is linked to multiple underlying assets or factors, combining different types of risk and return characteristics. Therefore, the correct answer is "Hybrid-linked."

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  • 5. 

    (C5/S1) 5 Which one of the following statements about portfolio bonds is FALSE?

    • Portfolio bonds are used for protection purposes

    • Portfolio bonds offer a wide range of investment choices

    • The principal of portfolio bonds is not guaranteed

    • Policyowners can appoint their own portfolio managers who are within the insurer’s platform

    Correct Answer
    A. Portfolio bonds are used for protection purposes
    Explanation
    Portfolio bonds are not typically used for protection purposes. They are investment products that offer a wide range of investment choices and allow policyowners to appoint their own portfolio managers. However, the principal of portfolio bonds is not guaranteed, meaning that there is a risk of loss of principal.

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  • 6. 

    (C1/S2.2) 6 Those investments that carry a low probability of returns while carrying a low probability of loss can be said to be:

    • Rare gems

    • Bold investments

    • Safe instruments

    • Unworthy investments

    Correct Answer
    A. Safe instruments
    Explanation
    Safe instruments refer to investments that have a low probability of loss while also having a low probability of returns. This means that these investments are considered to be relatively secure and stable, with a lower risk compared to other investment options. They may not offer high returns, but they provide a sense of security and are suitable for investors who prioritize capital preservation over high profitability.

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  • 7. 

    (C1/S3) 7 A form of funded credit derivative, structured as a security with an embedded credit default swap is known as a/an ___________ structured product.

    • Interest rate-linked

    • Equity-linked

    • Credit-linked

    • Market-linked

    Correct Answer
    A. Credit-linked
    Explanation
    A form of funded credit derivative, structured as a security with an embedded credit default swap is known as a credit-linked structured product. This type of structured product combines elements of both credit derivatives and traditional securities, allowing investors to gain exposure to credit risk without directly owning the underlying assets.

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  • 8. 

    (C1/S4.3) 8 Which of the following is FALSE regarding callable and non-callable securities?

    • Callable securities are cheaper than straight, non-callable securities

    • Callable securities pay higher coupons than non-callable securities

    • Callable securities expose investors to reinvestment risk

    • Callable securities do not involve interest rate risk

    Correct Answer
    A. Callable securities do not involve interest rate risk
    Explanation
    Callable securities do involve interest rate risk. Interest rate risk refers to the risk that the value of a security will fluctuate due to changes in interest rates. Callable securities are particularly exposed to interest rate risk because if interest rates decrease, the issuer of the security may choose to call back the security and issue new securities at a lower interest rate, resulting in a loss for the investor. Therefore, the statement that callable securities do not involve interest rate risk is false.

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  • 9. 

    (C1/S1.2) 9 This is an unsecured debenture of the issuer. By purchasing this, the investors are lending money to the issuer. This best describes:

    • A structured deposit

    • A structured note

    • A structured ILP

    • A structured fund

    Correct Answer
    A. A structured note
    Explanation
    This answer is correct because a structured note is a type of debt security that is issued by a financial institution and is typically backed by the issuer's credit. Investors who purchase structured notes are essentially lending money to the issuer in exchange for periodic interest payments and the return of the principal at maturity. This aligns with the description provided in the question, which states that by purchasing this, the investors are lending money to the issuer.

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  • 10. 

    (C3/S2.6) 10 John opened a margin account with an initial margin of $30,000 and a maintenance margin of $25,000. The broker will issue a margin call if the price of the futures contract falls by _________.

    • $1,000

    • $3,000

    • $4,950

    • $5,050

    Correct Answer
    A. $5,050
    Explanation
    In a margin account, the initial margin is the amount of money required to open the account, while the maintenance margin is the minimum amount that must be maintained to avoid a margin call. A margin call occurs when the value of the account falls below the maintenance margin.

    To calculate the price at which a margin call will be issued, we need to find the difference between the initial margin and the maintenance margin. In this case, the initial margin is $30,000 and the maintenance margin is $25,000.

    The difference between the two is $30,000 - $25,000 = $5,000.

    Therefore, a margin call will be issued if the price of the futures contract falls by $5,000.

    Since the answer options are given in increments of $1,000, the correct answer is $5,050.

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  • 11. 

    (C3/S2.5) 11 The June futures price for oil is US$150 per barrel, but the cash price is US$120 per barrel. Which for the following statements BEST describes this situation?

    • Basis is “US$30 in June”

    • Basis is “US$150 in June”

    • Basis is “US$30 over June”

    • Basis is “US$30 under June”

    Correct Answer
    A. Basis is “US$30 under June”
    Explanation
    The given situation describes a basis of "US$30 under June" because the cash price is lower than the futures price. This means that the basis is negative, indicating that the cash price is below the futures price by $30.

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  • 12. 

    (C1/S3) 12 An investment instrument that combines the characteristics of a zero coupon bond with a return component based on the performance of a single stock is said to be _________.

    • Interest rate-linked

    • Equity-linked

    • Hybrid-linked

    • Market-linked

    Correct Answer
    A. Equity-linked
    Explanation
    An investment instrument that combines the characteristics of a zero coupon bond with a return component based on the performance of a single stock is said to be equity-linked. This means that the investment's return is tied to the performance of a specific stock, providing the investor with exposure to the stock market while also having the characteristics of a bond.

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  • 13. 

    (C3/S3.4) 13 Which of the following option strategies would be LEAST appropriate if an investor is bullish on a certain stock?

    • Long call

    • Long stock

    • Selling naked put

    • Bull straddle

    Correct Answer
    A. Bull straddle
    Explanation
    A bull straddle is a strategy where an investor buys both a call option and a put option with the same strike price and expiration date. This strategy is typically used when there is uncertainty about the direction of the stock's price movement, as it allows the investor to profit from either an increase or decrease in the stock's price. However, if an investor is specifically bullish on a certain stock, they believe that the stock's price will increase. In this case, a bull straddle would be the least appropriate strategy because it allows for the possibility of the stock's price decreasing, which goes against the investor's bullish outlook.

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  • 14. 

    C3/S2.5) 14 Which of the following is the correct definition of Backwardation?

    • The futures price is higher than the spot price

    • The futures price is lower than the spot price

    • The futures price is equal to the spot price

    • The spot price is higher than the futures price

    Correct Answer
    A. The futures price is lower than the spot price
    Explanation
    Backwardation refers to a situation in the futures market where the futures price is lower than the spot price. This means that the market expects the price of the underlying asset to decline in the future. Traders may be willing to sell the asset at a lower price in the future because they believe that the price will continue to decrease. This creates an inverted price curve, with lower prices for future delivery compared to the current spot price.

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  • 15. 

    (C2/S1) 15 Which of the following is NOT an issuer-specific risk?

    • Interest rate risk

    • Regulatory action

    • Business risk

    • Operational risk

    Correct Answer
    A. Interest rate risk
    Explanation
    Interest rate risk is not an issuer-specific risk because it affects all issuers in the market. It refers to the risk of changes in interest rates impacting the value of fixed-income securities. Regulatory action, business risk, and operational risk, on the other hand, are all issuer-specific risks that are unique to each individual issuer. Regulatory action refers to the risk of changes in regulations affecting the issuer's operations, business risk refers to the risk of the issuer's business model or industry facing challenges, and operational risk refers to the risk of internal issues or failures within the issuer's operations.

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  • 16. 

    (C1/S3) 16 Which of the following was created to reduce the impact of knock-out?

    • Discount certificates

    • Tracker certificates

    • Bonus certificates

    • Airbag certificates

    Correct Answer
    A. Airbag certificates
    Explanation
    Airbag certificates were created to reduce the impact of knock-out. Knock-out refers to a situation where an investor loses their entire investment if a certain condition is not met. Airbag certificates provide a certain level of protection to investors by limiting the potential loss they can incur. Therefore, they were designed to minimize the impact of knock-out and provide some form of cushion to investors.

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  • 17. 

    (C3/S3.2) 17 There are two or more underlying assets with this type of options. This best describes a/an _______.

    • Rainbow option

    • Forward start option

    • Compound option

    • Binary option

    Correct Answer
    A. Rainbow option
    Explanation
    A rainbow option is a type of option that is based on two or more underlying assets. This means that the value of the option depends on the performance of multiple assets, rather than just one. In this case, the question is asking for the option that best describes a situation where there are multiple underlying assets, and the correct answer is a rainbow option.

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  • 18. 

    (C5/S1) 18 A portfolio bond is NOT suitable for investors who

    • Want to invest in bonds

    • Have a long investment time horizon

    • Want the flexibility of a wide range of investment choices

    • Are looking to invest in 10 different funds

    Correct Answer
    A. Want to invest in bonds
    Explanation
    A portfolio bond is not suitable for investors who want to invest in bonds because a portfolio bond is a type of investment product that offers a wide range of investment choices, including bonds, but it is not specifically focused on bonds. It is designed to provide flexibility and diversification by allowing investors to choose from a variety of investment options. Therefore, if an investor's main objective is to invest solely in bonds, a portfolio bond may not be the most suitable option for them.

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  • 19. 

    (C3/S1) 19 A pension fund with a diversified holding in the stock market faces considerable risk from general fluctuation of the stock price. ___________ may be used to reduce / eliminate the risk exposure.

    • Bonds

    • Stocks

    • Derivatives

    • Unit Trusts

    Correct Answer
    A. Derivatives
    Explanation
    Derivatives may be used to reduce or eliminate the risk exposure of a pension fund with a diversified holding in the stock market. Derivatives are financial instruments whose value is derived from an underlying asset, such as stocks. They can be used to hedge against potential losses by entering into contracts that offset the risk of the stock market fluctuations. By using derivatives, the pension fund can protect its investments and minimize the impact of general stock price fluctuations on its portfolio.

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  • 20. 

    (C1/S1.2) 20 This structured product works like a term insurance plus a structured fund, where the term insurance provides insurance coverage and the other portion provides investment returns. This description best describes:

    • A structured note

    • A structured fund

    • A structured ILP

    • A structured deposit

    Correct Answer
    A. A structured ILP
    Explanation
    This description best describes a structured ILP, which is a structured product that combines a term insurance component with an investment component. The term insurance provides insurance coverage, while the investment portion offers potential investment returns.

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  • 21. 

    (C3/S2) 21 Which one of the following statements about futures is TRUE?

    • All contracts are settled through physical delivery

    • They are non-standardised contracts traded on exchanges

    • They are subject to margin requirements

    • All of the above

    Correct Answer
    A. They are subject to margin requirements
    Explanation
    Futures contracts are subject to margin requirements, meaning that traders must deposit a certain amount of money, known as margin, with the exchange to initiate and maintain a position in the contract. This margin serves as collateral and helps to ensure that traders fulfill their obligations under the contract. Margin requirements vary depending on the contract and the exchange. The other statements in the options are not true. Futures contracts can be settled through physical delivery or cash settlement, and they are standardized contracts traded on exchanges.

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  • 22. 

    (C3/S3.7) 22 A seller of a call option has

    • The right to buy the underlying asset

    • The right to sell the underlying asset

    • The obligation to sell the underlying asset

    • The obligation to buy the underlying asset

    Correct Answer
    A. The obligation to sell the underlying asset
    Explanation
    A seller of a call option has the obligation to sell the underlying asset. This means that if the buyer of the call option decides to exercise their right to buy the underlying asset, the seller must sell it to them at the agreed upon price. The seller is obligated to fulfill this transaction, regardless of the market price of the underlying asset.

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  • 23. 

    (C1/S3.3) 23 Airbag certificates can be designed to have different airbag levels to suit an investor’s particular __________.

    • Preference

    • Participation

    • Risk tolerance

    • Expected return

    Correct Answer
    A. Risk tolerance
    Explanation
    Airbag certificates can be designed to have different airbag levels to suit an investor's particular risk tolerance. This means that investors can choose the level of risk they are comfortable with, and the airbag certificate can be customized accordingly. Risk tolerance refers to an individual's willingness to take on risk in their investment portfolio. By offering different airbag levels, investors can select the level of risk that aligns with their risk tolerance, ensuring that their investment suits their preferences and goals.

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  • 24. 

    (C1/S3.1) 24 Which of the following products is NOT designed to protect capital?

    • Structured deposits

    • Portfolio bonds

    • Capital guaranteed funds

    • Equity-linked notes

    Correct Answer
    A. Portfolio bonds
    Explanation
    Portfolio bonds are investment products that are designed to provide capital growth rather than protect capital. They typically invest in a range of assets such as stocks, bonds, and mutual funds, and their performance is directly linked to the performance of these underlying investments. Therefore, portfolio bonds carry a certain level of risk and do not guarantee the protection of capital. On the other hand, structured deposits, capital guaranteed funds, and equity-linked notes are specifically designed to offer capital protection to investors.

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  • 25. 

    (C4/S2.1) 25 Which of the following is a disadvantage of investing in structured ILPs?

    • Access to bulky investments

    • Fees and charges

    • Economies of scale

    • Portfolio diversification

    Correct Answer
    A. Fees and charges
    Explanation
    Investing in structured ILPs (investment-linked policies) has a disadvantage of fees and charges. These fees can include management fees, administration fees, and sales charges, which can eat into the returns of the investment. These fees are usually deducted from the investment value, reducing the overall growth potential. Therefore, investors should consider the fees and charges associated with structured ILPs before making an investment decision.

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  • 26. 

    (C1/S1.2) 26 The following may be considered a wrapper, except

    • Structured deposit

    • Structured term equity

    • Structured note

    • Structured fund

    Correct Answer
    A. Structured term equity
    Explanation
    The term "wrapper" refers to a financial product that combines multiple underlying assets into a single investment. Structured deposit, structured note, and structured fund are all examples of wrappers as they package different assets together. However, structured term equity does not fit this definition as it specifically refers to a type of investment that focuses on equity or stocks. Therefore, structured term equity is the exception among the given options.

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  • 27. 

    (C2/S2) 27 For non-publicly traded derivatives, it is a common practice to require the counterparty to put up __________.

    • Collaterals

    • Guarantees

    • Cash

    • Incentives

    Correct Answer
    A. Collaterals
    Explanation
    For non-publicly traded derivatives, it is common for the counterparty to be required to put up collaterals. Collaterals act as a form of security or guarantee for the party that is providing the derivative. It helps to mitigate the risk of default and provides assurance that the counterparty will fulfill their obligations. By requiring collaterals, the party offering the derivative can protect themselves from potential losses and ensure that they have some form of compensation in case the counterparty fails to meet their obligations.

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  • 28. 

    (C2/S3) 28 Company ABC is having cash flow problems. What kind of risk does this present to the investor?

    • Liquidity risk

    • General market risk

    • Issuer-specific risk

    • Counterparty credit risk

    Correct Answer
    A. Liquidity risk
    Explanation
    If Company ABC is having cash flow problems, it means that they may not have enough cash on hand to meet their financial obligations. This presents a liquidity risk to the investor because if the company is unable to generate enough cash to pay its debts or meet its financial commitments, it may result in financial distress or even bankruptcy. As a result, the investor may face difficulties in selling their investment or may not receive the expected returns.

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  • 29. 

    (C3/S3) 29 A call warrant is said to be _____________ when it has a positive intrinsic value.

    • “in-the-money”

    • “at-the-money”

    • “out-of-the-money”

    • “under-the-money”

    Correct Answer
    A. “in-the-money”
    Explanation
    A call warrant is said to be "in-the-money" when it has a positive intrinsic value. This means that the current price of the underlying asset is higher than the strike price of the warrant. In such a scenario, the warrant holder has the potential to make a profit by exercising the warrant and buying the underlying asset at a lower price than its current market value.

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  • 30. 

    (C1/S1.3) 30 When a market is closed to foreign investors, _____________ may be the only way to replicate the performance of the product, without directly investing in securities of the market.

    • Unsecured debt securities

    • Structured products

    • Fixed income instruments

    • Equity-like products

    Correct Answer
    A. Structured products
    Explanation
    When a market is closed to foreign investors, structured products may be the only way to replicate the performance of the product, without directly investing in securities of the market. Structured products are financial instruments that are created to meet specific investment objectives and are designed to provide exposure to underlying assets or indices. They can be customized to replicate the performance of a specific market or product, allowing investors to indirectly participate in the market's returns. This makes structured products a viable option for investors who are unable to directly invest in a closed market.

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  • 31. 

    (C3/S3.6) 31 If you are expecting the price of a stock to remain stable, which option strategy should you employ?

    • Bull straddle

    • Bear straddle

    • Covered calls

    • Protective puts

    Correct Answer
    A. Bear straddle
    Explanation
    A bear straddle is an options strategy that involves selling a call option and a put option with the same strike price and expiration date. This strategy is used when the investor expects the price of a stock to remain stable or decrease slightly. By selling both the call and put options, the investor collects premiums and profits if the stock price remains stable within a certain range. This strategy is considered neutral or bearish because it benefits from limited movement in the stock price.

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  • 32. 

    (C3/S3) 32 A/An ____________ is a security that entitles the holder the right to buy or sell an underlying security at a strike price on or before an expiry date.

    • Future

    • Option

    • Swap

    • Contract for differences

    Correct Answer
    A. Option
    Explanation
    An option is a security that gives the holder the right to buy or sell an underlying security at a specified price (strike price) on or before a specific date (expiry date). This means that the holder has the choice, but not the obligation, to exercise the option. Options are commonly used in financial markets to hedge against potential price movements or to speculate on future price changes.

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  • 33. 

    (C1/S3.3) 33 For a bonus certificate, what happens when the price of the underlying asset drops below the predetermined barrier?

    • Kick-in

    • Knock-out

    • Exercised

    • Expires

    Correct Answer
    A. Knock-out
    Explanation
    When the price of the underlying asset drops below the predetermined barrier, the bonus certificate is knocked out. This means that the certificate becomes worthless and the investor loses their investment.

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  • 34. 

    (C2/S5.2) 34 Which of the following statements about gearing is FALSE?

    • Gearing is an investment technique that can multiply gains

    • Gearing is an investment technique that can magnify losses

    • Gearing is an investment technique that can predict the movement of the market

    • Gearing is an investment technique in which money is borrowed to trade

    Correct Answer
    A. Gearing is an investment technique that can predict the movement of the market
    Explanation
    Gearing is an investment technique that involves borrowing money to trade, which can amplify both gains and losses. However, it does not have the ability to predict the movement of the market.

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  • 35. 

    (C2/S1) 35 Examples of issuer-specific risks include the following, except

    • Operational risk

    • Exchange rate

    • Business risk

    • Litigation

    Correct Answer
    A. Exchange rate
    Explanation
    Issuer-specific risks refer to risks that are specific to a particular issuer, such as a company or a government entity. These risks are typically related to the operations, financial health, or legal issues of the issuer. Operational risk refers to the risk of loss resulting from inadequate or failed internal processes, systems, or external events. Business risk refers to the risk of financial loss or poor performance due to factors specific to a company's industry or operations. Litigation risk refers to the risk of legal action or lawsuits against the issuer. Exchange rate risk, on the other hand, is a general risk that affects any entity involved in international trade or investments, and it is not specific to a particular issuer.

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  • 36. 

    (C3/S2.5) 36 When the futures price is higher than the spot price, the market is said to be in __________.

    • Contango

    • Contraction

    • Forwardation

    • Backwardation

    Correct Answer
    A. Contango
    Explanation
    When the futures price is higher than the spot price, it indicates that the market is in contango. Contango occurs when the demand for a commodity or financial instrument is expected to be higher in the future, leading to an increase in the futures price. This situation can occur when there are concerns about future supply shortages or when investors anticipate higher prices in the future. In contango, the futures price is higher than the spot price, creating an upward sloping futures curve.

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  • 37. 

    (C1/S3.3) 37 What is one advantage of an airbag certificate over a bonus certificate?

    • It allows the investor to buy the underlying stock at a discount

    • The upside potential is not capped

    • It tracks the performance of an underlying stock

    • It gives the underlying stock a chance to rebound during the life of the cerificate

    Correct Answer
    A. It gives the underlying stock a chance to rebound during the life of the cerificate
    Explanation
    An airbag certificate provides an advantage over a bonus certificate because it gives the underlying stock a chance to rebound during the life of the certificate. This means that if the stock price decreases after the certificate is purchased, there is still an opportunity for it to increase again before the certificate expires. This allows the investor to potentially recover any losses and make a profit if the stock rebounds. In contrast, a bonus certificate does not offer this opportunity for the stock to rebound, which could result in a loss for the investor if the stock price decreases.

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  • 38. 

    (C4/S6) 38 Which of the following documents is not required to be provided to an investor of a structured ILP at the point-of-sale?

    • Product summary

    • Benefit illustration

    • Product highlights sheet

    • Policy document

    Correct Answer
    A. Policy document
    Explanation
    The policy document is not required to be provided to an investor of a structured ILP at the point-of-sale. This document typically contains detailed information about the terms and conditions of the policy, which may not be necessary for the investor to review before making a purchase. The other documents listed, such as the product summary, benefit illustration, and product highlights sheet, are typically provided to give the investor a clear understanding of the product's features, benefits, and risks.

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  • 39. 

    (C1/S3) 39 An interest rate-linked structured product is linked to performance of __________.

    • Commodities

    • Interest rates

    • Market indices

    • Foreign exchange

    Correct Answer
    A. Interest rates
    Explanation
    An interest rate-linked structured product is designed to track and generate returns based on the performance of interest rates. This means that the value of the structured product will be influenced by changes in interest rates. Therefore, the correct answer is interest rates.

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  • 40. 

    (C1/S4.4) 40 The legal form of a Collective Investment Scheme is typically in a trust or a/an

    • Bond

    • Corporation

    • Equity

    • Deposit

    Correct Answer
    A. Corporation
    Explanation
    The legal form of a Collective Investment Scheme is typically in a corporation. This means that the scheme is structured as a separate legal entity, with its own rights and responsibilities. This is commonly done to provide limited liability protection to the investors and to ensure that the scheme can enter into contracts, own assets, and carry out its investment activities. A corporation structure also allows for easier transferability of shares and potential access to public markets for fundraising purposes.

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  • 41. 

    (C3/S3) 41 An European option is a contract that may be exercised ___________.

    • Only on expiration

    • Only in European market

    • 3 trading days before the expiry date

    • On any trading day on or before the expiry date

    Correct Answer
    A. Only on expiration
    Explanation
    An European option is a contract that can only be exercised on the expiration date. This means that the option holder can only choose to exercise the option and buy or sell the underlying asset at the agreed-upon price on the expiration date. Unlike American options, which can be exercised at any time before the expiration date, European options can only be exercised on the expiration date itself.

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  • 42. 

    (C4/S1.2) 42 Which one of the following would NOT be considered as soft dollar commission?

    • Research service

    • Economic analyses

    • Management fee

    • Data and quotation service

    Correct Answer
    A. Management fee
    Explanation
    A soft dollar commission refers to a practice where investment managers use client funds to pay for services that are not directly related to executing trades, such as research or economic analyses. These services are considered soft dollar commissions because they are paid for with commissions generated from the client's trades. However, a management fee is a separate fee that is charged by investment managers for their services and is not considered a soft dollar commission.

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  • 43. 

    (C3/S2.6) 43 The additional amount required to restore the account to the initial margin is called

    • Top-up

    • Margin call

    • Maintenance margin

    • Variation margin

    Correct Answer
    A. Variation margin
    Explanation
    The additional amount required to restore the account to the initial margin is called the variation margin. This is the amount that needs to be added to the account to bring it back to the required level of margin. It is important to maintain the initial margin in order to ensure that the account has enough funds to cover potential losses. The variation margin helps to protect against potential losses and maintain the required level of margin.

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  • 44. 

    (C3/S3) 44 A buyer of a put option has

    • The right to buy the underlying asset

    • The right to sell the underlying asset

    • The obligation to sell the underlying asset

    • The obligation to buy the underlying asset

    Correct Answer
    A. The right to sell the underlying asset
    Explanation
    A buyer of a put option has the right to sell the underlying asset. This means that they have the option to sell the asset at a predetermined price, known as the strike price, within a specified time period. This gives the buyer the opportunity to profit from a decline in the price of the underlying asset. The buyer is not obligated to sell the asset, but they have the right to do so if they choose.

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  • 45. 

    (C3/S4.3) 45 Which of the following swaps can be used to reduce counterparty risk?

    • Equity swap

    • Currency swap

    • Credit default swap

    • Interest rate swap

    Correct Answer
    A. Credit default swap
    Explanation
    A credit default swap can be used to reduce counterparty risk because it provides insurance against the default of a specific debt obligation. In this type of swap, one party agrees to make periodic payments to the other party in exchange for protection against the default of a specific debt instrument. This helps to mitigate the risk of the counterparty defaulting on their obligations, as the party purchasing the swap will receive compensation in the event of a default.

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  • 46. 

    (C4/S7.1) 46 Which one of the following statements relating to structured ILPs is TRUE?

    • All structured ILPs are homogeneous in nature

    • A structured ILP is designed purely as an investment product

    • A structured ILP should be valued at least once a month

    • A structured ILP is a risk free product

    Correct Answer
    A. A structured ILP should be valued at least once a month
    Explanation
    A structured ILP should be valued at least once a month because the value of the ILP can fluctuate based on market conditions and the performance of the underlying assets. Regular valuation helps to ensure that the ILP is being managed effectively and that the investor is aware of the current value of their investment.

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  • 47. 

    (C1/S1) 47 The following statements are reasons why a zero-coupon bond is used in structured products, EXCEPT

    • It is cheaper

    • It has a fixed maturity

    • More money may be invested for upside participation

    • It is zero risk

    Correct Answer
    A. It is zero risk
    Explanation
    Zero-coupon bonds are used in structured products because they are cheaper, have a fixed maturity, and allow more money to be invested for upside participation. However, they are not zero risk, as all investments carry some level of risk.

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  • 48. 

    (C1/S1.2) 48 The choice of “wrapper” depends on a number of factors, EXCEPT

    • The desired investment freedom

    • Regulatory restrictions on issuer

    • Time frame until maturity

    • Tax consideration

    Correct Answer
    A. Time frame until maturity
    Explanation
    The choice of "wrapper" refers to the investment vehicle or structure used to hold investments, such as a mutual fund or an individual retirement account (IRA). The factors that typically influence the choice of wrapper include desired investment freedom, regulatory restrictions on the issuer, and tax considerations. However, the time frame until maturity is not typically a factor in determining the choice of wrapper, as it is more relevant to the specific investment itself rather than the wrapper used to hold it.

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  • 49. 

    (C6/S1.4) 49 Mr. Tan is thinking of investing $100,000 into a structured ILP with the following features: Issuer = XYZ Insurance Company Tenure = 5 years Maturity Value = Initial capital amount Annual Payout = a) guaranteed payment of 0.5% of the single premium; OR b) 5% of the initial capital of every year if the price of all 5 stocks are equal or above 85% of their initial stock prices Calculate the total amount that Mr. Tan will receive at the end of the 5 years in the BEST possible market performance scenario.

    • $100,000

    • $101,000

    • $105,000

    • $125,000

    Correct Answer
    A. $125,000
    Explanation
    In the best possible market performance scenario, Mr. Tan will receive $125,000 at the end of the 5 years. This is because option b) states that he will receive 5% of the initial capital every year if the price of all 5 stocks are equal or above 85% of their initial stock prices. Since this is the best scenario, we can assume that the price of all 5 stocks will be equal or above 85% of their initial stock prices throughout the 5 years. Therefore, Mr. Tan will receive 5% of $100,000 ($5,000) every year for 5 years, resulting in a total amount of $125,000.

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Quiz Review Timeline (Updated): Mar 22, 2023 +

Our quizzes are rigorously reviewed, monitored and continuously updated by our expert board to maintain accuracy, relevance, and timeliness.

  • Current Version
  • Mar 22, 2023
    Quiz Edited by
    ProProfs Editorial Team
  • Oct 20, 2014
    Quiz Created by
    Jen1980

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