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1.
Investors can protect themselves from the credit risk of owning an exchange-traded note by using stop-loss orders.
False. Using a stop-loss order would address market risk, not credit risk. To address credit risk, investors should monitor the financial situation of the issuing bank.
2.
Exchange-traded notes are similar to traditional exchange-traded funds. Therefore, they are funds.
False. They are essentially bonds, not funds. They do not hold a fundful of securities.
3.
A sizable premium or discount on an exchange-traded note could be a red flag. Why?
Either of the above. Either of these situations could lead to big premiums or discounts on an exchange-traded note.
4.
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.
5.
What is not a tax difference between currency exchange-traded notes and all other exchange-traded notes?
Currency ETNs have foreign withholding tax. Foreign withholding tax is based upon the jurisdiction of the ETN, not the jurisdiction of the underlying index. Currency ETNs have the same tax status as other currency investments, so capital gains and income are charged at ordinary income tax rates, and are ineligible for the lower rate for long-term capital gains on investments held for more than one year. Also, even though they do not distribute interest income to investors, the holders are still responsible for the tax on the accrued interest income (and capital gains) when they file their taxes.
