Deck 11: Investment Basics

Question 1

Money needed in the next 9 months should be put into a ________.

A)savings account
B)short-term certificate of deposit
C)U.S.Treasury bill
D)All options are correct.

Answer 1

All options are correct.

Question 2

You are trying to decide how and when to take your next cruise.You could invest $200 a month for four years in a money market that is earning 4%,or you could go now,taking out a loan for $10,000 at 11% and paying it off over the next four years.If inflation runs at 2% for the next four years,what is the true difference in cost between the two options?

A)$400
B)$800
C)$1,205.16
D)$2,420.06

Answer 2

$2,420.06

Question 3

Which instrument does not have a zero default risk?

A)Federal Deposit Insurance Corporation (FDIC)account
B)National Credit Union Association (NCUA)account
C)Mutual fund account
D)U.S.Treasury bills

Answer 3

Mutual fund account

Question 4

Which of the following investments would be considered the most appropriate savings vehicle for an emergency fund?

A)Savings account
B)Certificate of deposit
C)Blue chip stocks
D)Rare jewels

Question 5

________ is a form of compensation for the investor who takes on the risk of the investment.

A)Risk premium
B)Interest
C)Coupon payment
D)All options are correct.

Question 6

________ is the risk you take when you lock into a fixed-rate investment for a specific length of time.

A)Default risk
B)Interest rate risk
C)Market risk
D)Liquidity risk

Question 7

________ is an outlay of money for a profit,where the risk exists that either some or the entire original amount may be lost.

A)An investment
B)Savings
C)Discipline
D)Risk premium

Question 8

The value of a dollar is

A)driven by the stock market.
B)steadily increasing.
C)controlled by the U.S.Treasury.
D)related to inflation.

Question 9

________ is the risk that the company you have invested in may declare bankruptcy.

A)Default risk
B)Interest rate risk
C)Market risk
D)Liquidity risk

Question 10

________ is the risk that the value of your investment will decrease due to changes in the market.

A)Default risk
B)Interest rate risk
C)Market risk
D)Liquidity risk

Question 11

Ten years ago,your grandparents gifted you a 20-year,$1,000 bond.The interest rate at the time of purchase was 5%.Today,comparable bonds are paying 7%.Approximately how much could you sell this bond for?

A)$860
B)$800
C)$918
D)$1,200

Question 12

The major types of risk are

A)inflation and taxation.
B)credit and bankruptcy.
C)default,interest rate,market,and liquidity.
D)None of the options are correct.

Question 13

What is the true purchasing power one year from now of $1,000 in a savings account,if it is earning 2 percent APY and inflation is 3 percent?

A)$1,000.00
B)$1,020.00
C)$990.00
D)$1,010.00

Question 14

________ is money set aside for future use in a secure,no-risk instrument.

A)An investment
B)Savings
C)Discipline
D)Allocation

Question 15

A household with an annual take-home pay of $120,000 a year needs how much in its emergency fund?

A)$1,200 to $7,200
B)$6,000 to $20,000
C)$30,000 to $72,000
D)$12,000

Question 16

________ is the risk of not being able to cash out an investment quickly enough to either meet cash flow needs or to prevent a loss.

A)Default risk
B)Interest rate risk
C)Market risk
D)Liquidity risk

Question 17

The first question to ask when deciding whether to save or invest is:

A)How much money do I have in an emergency fund?
B)When will I need the money?
C)Is the money insured?
D)Can I get at least 10% return on this money?

Question 18

The value of a dollar is ________.

A)driven by the stock market
B)controlled by Congress
C)controlled by the U.S.Treasury
D)refers to its purchasing power

Question 19

Inflation is

A)always bad for the economy.
B)helpful to an incumbent seeking re-election.
C)the increase of prices for goods and services over time.
D)a necessity to strengthen the dollar.

Question 20

Where should Elena put her graduation gift money of $5,000 if she plans to use it to help fund a European trip in four years?

A)In a short-term,safe,insured,guaranteed investment
B)In an index mutual fund
C)In gold or other precious metals
D)Under her mattress

Question 21

________ is a strong secure base with appropriately-proportioned building blocks to help maintain growth.

A)A market growth plan
B)Diversification
C)The investment pyramid
D)Budgeting

Question 22

What percentage of your investments should be part of Tier III,the 'high-risk,high-return' zone?

A)5%
B)10%
C)20%
D)Whatever percent of money you can lose without fear of bankruptcy

Question 23

________ is the spreading of assets among different investment options to reduce risk.

A)Laddering
B)Diversification
C)Portfolio
D)Savings

Question 24

________ is the diversification of the portfolio.

A)Asset allocation
B)Laddering
C)Portfolio
D)Savings

Question 25

Over the past 75 years,inflation has grown on average ________ /year,money in the bank has averaged a ________ return,and the stock market has averaged ________.

A)1.1%; 3.3%; 3.3%
B)3.1%; 3.9%; 12.4%
C)12.4%; 3.9%; 3.1%
D)12.4%; 12.4%; 12.4%

Question 26

If you are managing your own portfolio,you need to re-evaluate your investment goals,risk tolerance,portfolio returns,and asset allocation on at least ________ basis.

A)a monthly
B)an every-other-month
C)an every-6-months
D)an annual

Question 27

The investment pyramid ________.

A)was created in Egypt
B)is not reflective of the risk of investments
C)is only for people with incomes over $100,000 annually
D)is a guideline for investing and saving

Question 28

Right after college graduation,you open a targeted retirement account,allocating 90% of the funds in domestic and international stocks and 10% in corporate bonds.You plan to shift these allocations to 50% stock and 50% bonds upon retirement.You are now ready for retirement with $8,000,000 in your fund.How much money should you allocate to stocks and bonds?

A)$7,000,000 to stocks and $1,000,to bonds
B)$4,000,000 to stocks and $4,000,000 to bonds
C)$1,000,000 to stocks and $7,000,000 to bonds
D)You cannot answer this question without knowing the current inflation rate.

Question 29

Which investment vehicle is not part of Tier I,the 'low-risk,low-return' zone?

A)Certificates of deposit
B)Money market accounts
C)Fixed-income mutual funds
D)High-grade corporate bonds

Question 30

In the investment pyramid,your base is ________.

A)a 'cover your assets' zone
B)a 'penny a day' savings zone
C)a 'no-risk,known-return' savings zone
D)an investment base

Question 31

To entice investors to take on riskier investments,the investment must pay a(n)________ to offset the risk.

A)investment premium
B)investment incentive
C)personal guarantee
D)risk premium

Question 32

What proportion of your income should be in savings?

A)2-3 months of income
B)6-9 months of income
C)12 months of income
D)10%

Question 33

________ reduces risk by allocating investments proportionally to the investment pyramid.

A)Diversification
B)The lottery
C)Time management of money
D)Budgeting

Question 34

You determine that the appropriate balance for your investment-risk tolerance is a 70-20-10 proportion (stocks,bonds,and cash).After the first year,your $10,000 investment has doubled in value to $20,000,with $16,000 in stocks,$2,750 in bonds,and $1,250 in cash.How should your assets be allocated to retain your risk proportions?

A)Sell $2,000 in stocks,buy $1,250 in bonds,and add $750 in cash
B)Sell $1,000 in stocks,buy $2,250 in bonds,and add $750 in cash
C)Buy $1,000 in stock,sell $2,250 in bonds,and reduce cash by $750
D)Buy $2,000 in stock,sell $1,250 in bonds,and reduce cash by $750

Question 35

At Ava's second birthday,her grandparents wanted to pool their money to buy tax-free municipal bonds that would ultimately provide $100,000 for college expenses in 16 years.If calculating a gain of 4% interest,what dollar amount in municipal bonds will they need to buy on Ava's second birthday,assuming all interest was re-invested ?

A)$32,035
B)$64,069
C)$53,391
D)$120,000

Question 36

Risk tolerance for savings and investing ________.

A)is the same for every individual
B)is dependent on the individual
C)is not important when deciding on an investment strategy
D)should decrease with inflation

Question 37

To maintain a secure amount but still grow your money,________ your investments across different risk options.

A)minimize
B)diversify
C)stratify
D)ladder

Question 38

If you have a high-risk tolerance,and you want to invest money for the long term,you might invest in ________.

A)certificates of deposit
B)fixed-income mutual funds and high-grade corporate bonds
C)balanced mutual funds
D)precious metals

Question 39

________ is all the investments you hold.

A)An asset allocation account
B)Diversification
C)A Portfolio
D)Your savings

Question 40

Which investment vehicle is not part of Tier II,the 'medium-risk,medium-return' zone?

A)Quality growth stocks,blue-chip stocks
B)Money market accounts
C)Mutual funds,aggressive growth funds
D)Real estate

Question 41

In which life stage is it the best time to invest in a Roth IRA and start building your retirement fund?

A)Independent
B)Young family
C)Empty nest
D)Retirement

Question 42

Your tax liability is 30 percent of your $60,000 salary,and you contribute 7 percent annually to your 401(k).If your employer contributes $0.50 per dollar up to the first 5 percent of your salary,how much money is being deposited in total to your 401(k)by taking full advantage of the employer match?

A)$2,500
B)$4,500
C)$4,250
D)$5,700

Question 43

Your tax liability is 30 percent of your $60,000 salary,and you contribute $4,000 to your 401(k)each year.If your employer matches $0.50 per dollar contributed up to five percent of your salary,how much free money are you getting this year by taking full advantage of the employer match?

A)$4,000
B)$1,500
C)None
D)$2,000

Question 44

The higher the risk,the higher the potential return and the less likely you will achieve the higher return.

Question 45

A Coverdell Education Savings Account is similar to a Roth IRA in that the contributions to the accounts are after-tax and they grow free of federal income tax.

Question 46

A Roth IRA does not offer any tax advantage on the contribution,but it grows tax-free and all withdrawals over age 59 ½ (providing the account has been open over 5 years)are tax-free.

Question 47

A reason not to invest in a mutual fund is that you have a targeted retirement date and you would like to reduce your market risks gradually as you approach retirement.

Question 48

With a 529 college savings account,there are no taxes on the account's earnings; anyone (your mom,dad,grandparents,uncles,aunts,etc.)can contribute to the account; and,in some state-sponsored plans,the contribution is deductible from state taxes.

Question 49

Important savings goals during the independent life stage are investing in your education and investing in your retirement.

Question 50

All 401(k)contributions are on a pretax basis and the earnings are tax-deferred.

Question 51

Which instrument is not typical for persons in the independent financial life stage?

A)Direct deposit into savings account
B)529 college savings plan
C)Quality stock
D)Roth IRA

Question 52

Your tax liability is 30 percent of your $50,000 salary,and you contribute $2,000 to your 401(k).If your employer matches $2,000,what is your immediate ROI upon your decision to contribute $2,000 to your 401(k)?

A)30%
B)60%
C)130%
D)286%

Question 53

Saving your money in a low-risk account grows its purchasing power.

Question 54

Which is not one of the advantages of 529 college savings plans?

A)You pay no taxes on the account's earnings.
B)Anyone (your mom,dad,grandparents,uncles,aunts,etc.)can contribute to the account and,in some state-sponsored plans,the contribution is deductible from state taxes.
C)Even if you are currently in college,you can contribute to a 529 plan,and the earnings won't be taxed if they are used for qualified educational expenses.
D)Balances left over after completing your education can be rolled over into a Roth IRA.

Question 55

When allocations are made to each tier of the investment pyramid proportionally,you mitigate overall risks while continuing to grow wealth.

Question 56

Investing is putting money at risk.