AIP Investment Products & Financial Instruments 4

Question 1

An investor writes (sells) a covered call on 100 shares of XYZ stock they own. What is the PRIMARY risk of this strategy?

Accepted Answer

The obligation to sell the shares at the strike price, capping upside gains

Answer

When writing a covered call, the investor collects a premium but must sell shares at the strike price if exercised, limiting participation in any stock price appreciation above the strike.

Question 2

Which of the following private equity strategies focuses on acquiring established companies using significant amounts of borrowed capital?

Accepted Answer

Leveraged buyout (LBO)

Answer

Leveraged buyouts (LBOs) use substantial debt financing — typically 60–80% of the purchase price — to acquire mature companies, with the target's assets and cash flows serving as collateral for the debt.

Question 3

A bond's duration is best described as:

Accepted Answer

A measure of the bond's weighted average time to receive cash flows, indicating interest rate sensitivity

Answer

Duration measures the weighted average time to receive all cash flows and serves as a key indicator of a bond's price sensitivity to interest rate changes — higher duration means greater price volatility.

Question 4

A commodity swap in which an oil producer receives a fixed price per barrel and pays the floating market price is primarily used to:

Accepted Answer

Hedge against falling oil prices by locking in revenue

Answer

By receiving a fixed price and paying the floating market price, the oil producer hedges downside risk — if prices fall, the swap's fixed leg compensates for lost revenue.

Question 5

Which statement about closed-end funds is CORRECT?

Accepted Answer

They trade on exchanges at prices that can differ significantly from NAV due to fixed share counts

Answer

Closed-end funds issue a fixed number of shares in an IPO and trade on exchanges, where supply and demand can push prices to persistent premiums or discounts relative to the fund's net asset value.

(AIP) Accredited Investment Professional Certification Practice Test

(AIP) Accredited Investment Professional Certification Practice Test

AIP Investment Products & Financial Instruments 4