RIA Investment Vehicle 2 — Questions and Answers

Question 1: A closed-end fund differs from an open-end mutual fund in that:

It redeems shares at NAV on demand
It issues a fixed number of shares traded on exchanges (Correct answer)
It is always actively managed
It charges no management fees

Correct answer: It issues a fixed number of shares traded on exchanges

Closed-end funds issue a fixed number of shares that trade on stock exchanges, unlike open-end funds that continuously issue/redeem shares at NAV.

Open-end (mutual) funds create new shares when investors buy and redeem them when investors sell, always at NAV. Closed-end funds conduct an IPO for a fixed number of shares, which then trade on exchanges at market prices that may differ from NAV (at premium or discount). This structure can affect liquidity and pricing.

Question 2: Which type of annuity contract guarantees a fixed payout regardless of market performance?

Variable annuity
Indexed annuity
Fixed annuity (Correct answer)
Immediate annuity

Correct answer: Fixed annuity

Fixed annuities guarantee a specified interest rate and payout, providing predictable income regardless of market conditions.

Fixed annuities provide a guaranteed interest rate during the accumulation phase and fixed payments during payout. Variable annuities tie returns to investment subaccounts, creating market exposure. Indexed annuities link returns to a market index with some downside protection. Advisers must understand these differences for suitable client recommendations.

Question 3: A Real Estate Investment Trust (REIT) must distribute at least what percentage of taxable income as dividends?

50%
75%
90% (Correct answer)
100%

Correct answer: 90%

REITs must distribute at least 90% of taxable income to shareholders to maintain their tax-advantaged status.

To qualify as a REIT, a company must distribute at least 90% of its taxable income as dividends. This requirement makes REITs attractive income investments but also means they retain little earnings for growth. REITs allow individual investors to invest in real estate portfolios without directly owning properties.

Question 4: Which investment vehicle allows investors to gain exposure to commodities without directly holding physical assets?

Municipal bonds
Commodity ETFs (Correct answer)
Money market funds
Preferred stock

Correct answer: Commodity ETFs

Commodity ETFs provide exposure to commodities (like gold, oil, or agricultural products) without requiring physical ownership.

Commodity ETFs can hold physical commodities (like gold bars), futures contracts, or stocks of commodity-related companies. They offer liquidity and accessibility compared to direct commodity ownership or futures trading. Advisers use commodity ETFs to add diversification and inflation hedging to client portfolios.

Question 5: Preferred stock typically has which characteristic compared to common stock?

Higher voting rights
Priority dividend claims but limited upside (Correct answer)
Greater capital appreciation potential
No dividend payments

Correct answer: Priority dividend claims but limited upside

Preferred stock has priority over common stock for dividends and in liquidation, but typically lacks voting rights and significant price appreciation.

Preferred stockholders receive dividends before common stockholders and have priority claims in bankruptcy. However, preferred dividends are typically fixed, limiting upside. Most preferred shares have limited or no voting rights. Cumulative preferred stock accumulates unpaid dividends; non-cumulative does not. Advisers consider preferred stock for income-seeking clients.

Question 6: A zero-coupon bond:

Pays semiannual interest
Is issued at par with variable payments
Is sold at a discount and pays face value at maturity (Correct answer)
Is only available to institutional investors

Correct answer: Is sold at a discount and pays face value at maturity

Zero-coupon bonds are sold at a deep discount and pay no periodic interest—the investor receives the full face value at maturity.

Zero-coupon bonds are issued at a significant discount to face value. The difference between purchase price and face value represents the investor's return. No periodic interest is paid. Tax rules require investors to pay annual income tax on 'phantom income' (the accrued discount) even though no cash is received. They're often used for specific future obligations.

RIA Investment Vehicle 2

A closed-end fund differs from an open-end mutual fund in that: