Choose wisely. There is only one correct answer to each question.
0%
Keep studying!
Review your answers below to learn more.
1.
Exchange-traded notes (ETNs) and exchange-traded funds (ETFs) have a lot in common. Which one of the following statements is false?
ETNs and ETFs both hold a basket of securities in order to track the performance of an index. ETNs and ETFs both trade on exchanges; that's what the 'E' in their name stands for. They both have a create and redeem process for their shares, which allows authorized participants to exchange shares for the net asset value of the underlying index, preventing large trading spreads from opening up. They both charge a fee based on a percentage of the assets under management. However, only ETFs are funds which actually hold securities in trust for the shareholders; ETNs are the debt of the issuer, who promises to pay the return of the underlying index instead of a set interest rate.
2.
An investor in exchange-traded notes can look forward to the kinds of regulatory protections that exchange-traded funds and open-end mutual funds enjoy.
False. ETNs are not governed under the same regulatory structure as those other investments.
3.
A large premium on an existing exchange-traded note might do what if new shares of the note are issued?
Fall. Large premiums can quickly collapse upon the issuance of new shares of an exchange-traded note.
4.
How can investors protect themselves from the credit risk inherent in owning an exchange-traded note?
By monitoring the financial situation of the issuing bank, and selling out if warning signs appear. The other three options are ways to mitigate the market risk of the investment, not the credit risk.
5.
Distributions from exchange-traded notes are taxed at _______.
Ordinary income rates. Distributions, though rare, are taxed at ordinary income rates.
