Which of the following terms best describes ETNs (Exchange-Traded Notes) and leveraged ETFs (Exchange-Traded Funds)?

• A. Derivative securities
• B. Municipal bonds
• C. Fixed-income securities
• D. Equity securities

Answer: (A)

Verified step by step guidance

1. Understand the nature of ETNs (Exchange-Traded Notes): ETNs are unsecured debt securities issued by financial institutions. Their value is tied to the performance of an underlying index or asset, making them derivative securities.
2. Understand the nature of leveraged ETFs (Exchange-Traded Funds): Leveraged ETFs aim to amplify the returns of an underlying index or asset, often using derivatives such as futures contracts to achieve this leverage.
3. Review the definition of derivative securities: Derivative securities derive their value from an underlying asset, index, or financial instrument. Both ETNs and leveraged ETFs fit this definition because their value is linked to the performance of other financial instruments or indices.
4. Compare the other options: Municipal bonds are debt securities issued by local governments, fixed-income securities provide regular interest payments, and equity securities represent ownership in a company. None of these accurately describe ETNs or leveraged ETFs.
5. Conclude that the best term to describe ETNs and leveraged ETFs is 'Derivative securities,' as their value is derived from underlying assets or indices.