Advanced Diploma of Financial Planning (ADFP) Practice Test

What is true about how securities in UITs are handled?

1. Securities are frequently traded

2. They are held until maturity

3. Securities are selected by day traders

4. Securities can be easily liquidated

The correct answer is: They are held until maturity

Securities in Unit Investment Trusts (UITs) are designed to be held until maturity, which aligns with the characteristics of a UIT. In a UIT, a fixed portfolio of securities is assembled, and investors purchase units representing fractional ownership in that portfolio. Unlike mutual funds, which are actively managed and can involve frequent buying and selling of securities to respond to market conditions, UITs maintain a specific investment strategy with a predetermined termination date. This structure means that the securities in a UIT are held to maturity, allowing investors to receive income distributions from the interest or dividends paid by the securities. Ultimately, when the UIT matures, the trust liquidates the underlying assets and distributes the proceeds to the investors. This feature is a key distinguishing factor of UITs, as it offers a more stable investment approach compared to other forms of investment vehicles that may be more actively managed. The other options do not accurately reflect the nature of UITs. Frequent trading and selection by day traders are more characteristic of actively managed funds or individual stock trading strategies. While securities can be liquidated, the ease of doing so is not a defining trait of UITs, as they tend to be less liquid than other investment options, primarily because they are not traded on secondary markets.