Free M9A — Life Insurance And Investment-Linked Policies II Practice Questions

Sample Practice Questions

Try these 10 sample questions from the M9A — Life Insurance And Investment-Linked Policies II practice bank. Each includes the answer and explanation. Continue with the interactive practice above to review the full question set.

1. 1What legal investment form is a structured note?

   1. A.A debt obligation of its issuerCorrect answer: A
   2. B.An equity ownership stake in its issuer
   3. C.A deposit account with its distributor
   4. D.A direct holding of its reference assets

   Explanation: MoneySense states, "A structured note is a debt obligation of the issuer of the structured note." The investor holds the issuer’s debt, rather than automatically owning issuer shares, a deposit account or the referenced assets.

   Reference: MoneySense — Understanding structured notes — Returns from structured notes

2. 2A structured note’s benchmark performs well, but its issuer cannot meet its payment obligations. Which risk has materialised?

   1. A.Market-direction risk
   2. B.Issuer credit riskCorrect answer: B
   3. C.Reinvestment risk
   4. D.Foreign-exchange risk

   Explanation: The source states, "The issuer of the structured note defaults on its commitments under the structured note" A favourable benchmark does not discharge the issuer’s obligation. Failure to pay is issuer default, rather than a benchmark movement, reinvestment problem or currency conversion.

   Reference: MoneySense — Understanding structured notes — What are the risks?

3. 3Which feature of exchange-traded futures helps many investors trade the same contract?

   1. A.Terms are renegotiated separately for every buyer
   2. B.Contract size and delivery terms are standardisedCorrect answer: B
   3. C.Delivery quantities are chosen after the contract expires
   4. D.Contract specifications change with each investor’s risk tolerance

   Explanation: The source states, "Exchanges set standardized contract terms, including the amount of the commodity to be delivered" Standard contract terms make positions comparable and tradable. Bilateral renegotiation, post-expiry quantity selection and investor-specific specifications would remove that standardisation.

   Reference: CFTC — Economic Purpose of Futures Markets and How They Work — Exchanges

4. 4How do premiums and policy charges interact with the investment units of an ILP?

   1. A.Premiums buy units, and some units are sold to meet insurance and other chargesCorrect answer: A
   2. B.Premiums buy units, while charges must always be paid from the insurer’s profits
   3. C.Premiums pay only for insurance, while the insurer supplies investment units free
   4. D.Premiums are bank deposits, while the units represent unpaid interest only

   Explanation: The source states, "Some of the units purchased are then sold to pay for insurance and other charges, while the rest remain invested." The unit-based insurance wrapper channels premiums into investments and finances charges by cancellation of units. It is not a free investment benefit or a bank deposit.

   Reference: MoneySense — Understanding investment-linked insurance policies — What are ILPs?

5. 5Why can combining assets with low correlation help an ILP investment portfolio?

   1. A.It makes every asset earn the same return each year
   2. B.It can reduce overall loss risk because assets need not move togetherCorrect answer: B
   3. C.It removes every underlying asset’s individual market risk
   4. D.It makes the insurer guarantee the portfolio’s original value

   Explanation: The source states, "a portfolio of lowly-correlated assets does not all move in the same direction at the same time" Low correlation can reduce the portfolio’s combined fluctuations. It does not force equal returns, erase each asset’s risk or create an insurance guarantee.

   Reference: MoneySense — Managing investment risk — Managing risk — Diversification

6. 6A market-linked investment uses a point-to-point return based only on its start and final index levels. The index starts at 1,000, reaches 1,300 during the term and ends at 1,080. Before charges, what reference-index return enters that formula?

   1. A.30%
   2. B.8%Correct answer: B
   3. C.38%
   4. D.−22%

   Explanation: The source states, "compare the change in an index at two discrete points in time" For the specified point-to-point method, reference return = (1,080 − 1,000)/1,000 = 8%. The intermediate peak is excluded. 30% uses the peak, 38% adds two gains, and −22% incorrectly compares the final level with the peak using the starting denominator.

   Reference: SEC/FINRA — Structured Notes with Principal Protection — How Do Structured Notes with Principal Protection Calculate the Return on My Investment? — Market-linked gains

7. 7Which payments of a structured note can be linked to the performance of its reference asset?

   1. A.Its interest payments, with principal necessarily fixed
   2. B.Its principal repayment, with interest necessarily fixed
   3. C.Its interest payments, principal repayment, or bothCorrect answer: C
   4. D.Its fees alone, with interest and principal both fixed

   Explanation: The source says, "It may be the interest that is payable on the structured note and/or the principal repayment, that is linked to the performance of the asset or benchmark." Thus linkage can affect either payment or both; it is not restricted to fees.

   Reference: MoneySense — Understanding structured notes — What are structured notes?

8. 8A note passes the risk of an embedded swap counterparty’s non-performance to its investor. What loss can this expose the investor to?

   1. A.Only the broker’s sales commission
   2. B.Only the next scheduled coupon
   3. C.The entire original investmentCorrect answer: C
   4. D.Only profits above the principal

   Explanation: The source states, "may result in the total loss of the original investment amount." Counterparty failure can pass through to principal, not merely commission, a coupon or accumulated profit. This tests the derivative-counterparty channel separately from the note issuer’s own default.

   Reference: MoneySense — Understanding structured notes — What are the risks?

9. 9What happens through daily marking to market of a futures position?

   1. A.The original contract quantity is revised to match that day’s volume
   2. B.Only the final maturity price is recorded without interim adjustments
   3. C.The contractual delivery date is moved forward one trading day
   4. D.Gains or losses are reflected in the trader’s margin accountCorrect answer: D

   Explanation: The source states, "if the futures position is profitable, the profits will be added to the margin account" Daily marking recognises gains and losses in the margin account. It does not revise quantity, postpone delivery or defer all recognition until maturity.

   Reference: CFTC — Economic Purpose of Futures Markets and How They Work — Margin

10. 10Which premium-payment feature distinguishes a single-premium ILP from a regular-premium ILP?

    1. A.The single-premium policy receives compulsory monthly top-ups
    2. B.The regular-premium policy accepts only one lifetime payment
    3. C.The single-premium policy starts with a lump-sum premiumCorrect answer: C
    4. D.The regular-premium policy funds its premiums solely from dividends

    Explanation: The source states, "Single-premium ILPs – You pay a lump sum premium to buy units in a sub-fund." The distinction is lump-sum payment versus premiums paid on an ongoing basis. Optional top-ups are not compulsory monthly single-premium payments, and dividends are not the definition of regular premiums.

    Reference: MoneySense — Understanding investment-linked insurance policies — Types of ILPs