Unit 5 Flashcards

Question

Describe a limited partnership

Answer 1

LPs are investment opportunities that permit the economic consequences of a business to flow or pass through to investors. The businesses themselves are not tax-paying entities.

Answer 2

is the lack of liquidity in the partnership interest. The secondary market for LP interests is extremely limited; investors who wish to sell their interests frequently cannot locate buyers (i.e., interest in the business is not freely transferable).

Answer 3

General partners (GPs) have unlimited liability, meaning that they can be held personally liable for business losses and debts.

Answer 4

is a limited partnership (LP)

Answer 5

general partner and the limited partner. An LP must have at least one of each.

Answer 6

These programs pass through to investors a share in the income, gains, losses, deductions, and tax credits of the business entity. The investors (partners) would then have the responsibility to report individually to the IRS.

Answer 7

a tenants in common (TIC), which provides limited liability and no management responsibilities to the limited partners.

Answer 8

to manage all aspects of the partnership and have a fiduciary responsibility to use the invested capital in the best interest of the investors.

Answer 9

In managing the partnership, they make decisions that legally bind the partnership, and they buy and sell property for the partnership; they are compensated for fulfilling these duties.

Answer 10

to provide other government entities, such as cities, counties, school districts, or other state agencies, with a short-term investment vehicle to invest funds. The LGIPs are generally formed as a trust in which municipalities can purchase shares or units in the LGIP's investment portfolio.

Answer 11

a money market fund

Answer 12

LGIPs are not required to register with the SEC and are not subject to the SEC's regulatory requirements, given that LGIPs fall within the governmental exemption, just as municipal securities do. Therefore, investment guidelines and oversight for LGIPs can vary from state to state.

Answer 13

disclosure documents

Answer 14

which generally include information statements, investment policy, and operating procedures. The information statement typically details the management fees associated with participation in the LGIP.

Answer 15

tax-advantaged savings accounts for individuals with disabilities and their families. They were created as a result of the passage of the ABLE Act of 2014.

Answer 16

The beneficiary of the account is the account owner, and income earned by the accounts is not taxed. The ABLE Act limits eligibility to individuals with significant disabilities where the age of onset of the disability occurred before turning age 26.

Answer 17

one need not be under the age of 26 to be eligible to establish an ABLE account. One could be over the age of 26, but as long as the onset of the disability occurred before age 26, one is eligible to establish an ABLE account.

Answer 18

an individual meets the age/onset criteria and is also receiving benefits either through Social Security insurance (SSI) and/or Social Security disability insurance (SSDI), he is automatically eligible to establish an ABLE account. Only one ABLE account per person is allowed.

Answer 19

which can be made by any person, including the account beneficiary, as well as family and friends, must be made using after-tax dollars and is not tax deductible for purposes of federal income taxes. Some states, however, do allow income tax deductions for contributions made to an ABLE account.

Answer 20

for inflation

Answer 21

■ An investment managed by others (the GP) ■ Limited liability (can only lose the amount invested) ■ Flow-through of income and certain expenses

Answer 22

limited partners have limited liability, meaning that they can't lose more than they invested.

Answer 23

They have no business management responsibilities, and in fact, should they participate in any day-to-day management of the business, they can lose their limited liability status and be considered a GP Limited partners have the right to vote on overall business objectives and the right to receive cash distributions, capital gains, and tax deductions generated by the business. They have the right to inspect all books and records, and if the GP does not act in the best interest of the business, limited partners have the right to sue the GP.

Answer 24

investors receive a private placement memorandum for disclosure. Generally, such private placements involve a small group of limited partners, each contributing a large sum of money.

Answer 25

1. Secured lenders 2. Other creditors 3. Limited partners—first, for their claims to shares of profits and then for their claims to a return of contributed capital 4. GPs

Answer 26

LPs are liquidated on a predetermined date specified in the partnership agreement

Answer 27

private placements or public offerings.

Answer 28

Early shutdown may occur if the partnership sells or disposes of its assets or if a decision is made to dissolve the partnership by the limited partners holding a majority interest

Answer 29

To find the cash flow, add the depreciation back into the business results. Profit/loss $-30,000 Depreciation $50.000 Cash Flow $ 20,000

Answer 30

passive income and is added to ordinary income for tax purposes

Answer 31

passive losses. Passive losses offset passive income only.

Answer 32

income taxes directly; tax credits are not a type of income.

Answer 33

LPs are sold by prospectus for disclosure. In a public offering distribution, a larger number of limited partners each making a relatively small capital contribution ($1,000- $5,000) is more likely because they do not need to be accredited investors.

Answer 34

tax shelters. The structure of the limited partnership allows for the investor to receive income that is sheltered from taxes.

Answer 35

depreciation and depletion. These deductions are not actual cash costs. They reduce taxable income without affecting cash flow.

Answer 36

Real estate programs Oil and gas programs Leasing programs

Answer 37

■ Capital growth potential—achieved through appreciation of property ■ Cash flow (income)—collected from rents ■ Tax deductions—from mortgage interest expense and depreciation allowances for "wearing out the building" and capital improvements ■ Tax credits—for government-assisted housing and historic rehabilitation (tax credits are very strong incentives because they reduce tax liability dollar for dollar)

Answer 38

That depends on the client's objective. Conversely, an existing property would be better suited for an investor who desires current cash flow, but it likely offers less capital appreciation potential.

Answer 39

can invest in raw land, new construction, or existing properties

Answer 40

■ Intangible drilling costs (IDCs)—These are costs associated with drilling, such as wages, supplies, fuel, and insurance that have no salvage value when the program ends. These IDCs can be written off (deducted) in full in the first year of operation. ■ Depletion allowances—These are tax deductions that compensate the program for the decreasing supply of oil or gas (or any other resource or mineral) after it is taken out of the ground and sold.

Answer 41

deductible over several years. The deduction is taken as depreciation. In other words, each year, the asset is worth a little less, and that depreciated amount can now be deducted.

Answer 42

Equipment leasing programs are created when DPPs purchase equipment leased to other businesses.

Answer 43

1. capital appreciation but would not provide current income. 2. desires current cash flow, but it likely offers less capital appreciation potential.

Answer 44

include speculative or exploratory (wildcatting) programs to locate new oil deposits (generally considered the riskiest developmental programs that drill near existing producing wells in hopes of locating new deposits) and income programs that invest in producing wells (generally considered the least risky)

Answer 45

There is effectively no secondary market for limited partnership interests. Any transfer of interest in an LP requires permission of the general partner. An investor in a limited partnership should assume she will own the program until it ends.

Answer 46

is a company that manages a portfolio of real estate, mortgages, or both to earn profits for shareholders

Answer 47

■ own commercial property (equity REITs), ■ own mortgages on commercial property (mortgage REITs), or ■ do both (hybrid REITs).

Answer 48

REITs pool capital in a manner similar to that of an investment company but are not investment companies, neither open nor closed end. Shareholders receive dividends from investment income or capital gains distributions.

Answer 49

The IRS will likely impose taxes and penalties for the underreporting of income plus interest on the unpaid taxes. The limited partners would have to pay for the problem.

Answer 50

Many REITs are registered with the SEC and, therefore, are subject to all disclosure requirements

Answer 51

Many REITs are traded on a stock exchange

Answer 52

If the IRS disallows a prior tax benefit, the consequences flow through to the limited partners

Answer 53

there are REITs that are not registered with the SEC. known as private REITs. Nonregistered REITs are not subject to the same disclosure requirements as public REITs and, therefore, are subject to greater risk

Answer 54

organized as trusts in which investors buy shares or certificates of beneficial interest, either on stock exchanges or in the OTC market.

Answer 55

they differ in that the hedge fund has more flexibility in the investment strategies employed. While hedging is the practice of attempting to limit risk, most hedge funds specify generating high returns as their primary investment objective. In attempting to achieve these returns, they tend to shoulder a substantial amount of risk.

Answer 56

are often organized as limited partnerships and are sold as private placements. Hedge funds are similar to mutual funds in that investments are pooled and professionally managed

Answer 57

■ highly leveraged portfolios (borrowing to purchase securities); ■ the use of short positions (selling securities the portfolio does not own); ■ the utilization of derivative products such as options and futures; ■ currency speculation; ■ commodity speculation; and ■ the investment in politically unstable international markets.

Answer 58

limit the number of investors or require large initial or minimum investments if they so desire. Some also require that investors maintain the investment for a minimum length of time

Answer 59

senior, unsecured debt securities issued by a bank or financial institution. Therefore, they are backed only by the good faith and credit of the issuer.

Answer 60

, considered an equity security, invests in a specific group of stocks and generally does so to mimic a particular index, such as the S&P 500.

Answer 61

is that the ETF trades like a stock on the floor of an exchange and, in regard to how it trades, is similar to a closed-end investment company rather than an open-end mutual fund. They are registered, however, as either an open-end fund or as a UIT. And, unlike mutual funds, ETFs can be purchased on margin and sold short. Expenses tend to be lower than those of mutual funds, and the management fee is also low.

Answer 62

The notes track the performance of a particular market index, but do not represent ownership in a pool of securities the way share ownership of a fund does.

Answer 63

■ Pricing and ease of trading—Because individual ETF shares are traded on exchanges, they can be bought or sold anytime during the trading day at the price they are currently trading at as opposed to mutual funds, which use forward pricing and are generally priced once at the end of the trading day. ■ Margin—ETFs can be bought and sold short on margin like other ETPs. Mutual funds cannot be bought on margin, nor can they be sold short. ■ Operating costs—ETFs traditionally have operating costs and expenses that are lower than most mutual funds. ■ Tax efficiency- ETFs can and sometimes do distribute capital gains to shareholders like mutual funds do, but this is rare. Understanding that these capital gains distributions are not likely, there are no further tax consequences with ETF shares until investors sell their shares. This may be the single greatest advantage associated with ETFs.

Answer 64

■ Commissions—The purchase or sale of ETF shares is a commissionable transaction. The commissions paid can erode the low-expense advantage of ETFs. This would have the greatest impact when trading in and out of ETF shares frequently or when investing smaller sums of money. ■ Overtrading—Given the ability to trade in and out of ETFs easily, the temptation to do so is possible. Excessive trading can eliminate the advantages associated with investing in a diversified portfolio and add to overall commissions being paid by the investor, further eroding any of the other expense and operating-cost advantages associated with ETFs. ■ Market influences on price—Because ETFs trade on exchanges, share prices can be influenced by market forces such as supply and demand, like any other ETP. In this light, investors need to recognize that just as they might receive less than book value per share when selling corporate shares of stock, they might also receive less than NAV per share when selling ETF shares.

Answer 65

is default risk. Liquidity risk is also a common concern. Even though they are called 'exchange traded; very few of them have ever actually been listed on an exchange.

Answer 66

the performance of the underlying index or benchmark

Answer 67

are bond-like instruments with a stated maturity date, but they do not pay interest and offer no principal protection. Instead, ETN investors receive a cash payment linked to the performance of the underlying index minus management fees when the note matures.

Answer 68

if the credit of the underwriting bank should falter, the note might lose value in the same way any other senior debt of the issuer would. Additionally, there are limits to the size of ETN issues.

Unit 5 Flashcards

(103 cards)