SIE Exam Question 304: Answer and Explanation

Question: 304

The credit quality of an exchange-traded note is

• A. always difficult to determine owing to the lack of disclosure required when selling these products to the public.
• B. usually very strong, since they are commonly sold by broker-dealers who must meet minimum capital standards.
• C. based on the credit worthiness of the issuer, typically the investment bank that structures the note.
• D. primarily connected to the strength of the underlying security.

Correct Answer: C

Explanation:

C - The credit quality of an exchange-traded note is based on the creditworthiness of the issuer, usually an investment bank that structures the note and sets its terms. Importantly, the credit quality is not based on the underlying portfolio for which the performance of the investment is based upon.