Focus on the Topics That You Struggle with the Most

Personal FinanceName
Date

Investment Test
Study Guide

Focus on the topics that you struggle with the most!!

1. What is the purpose of investing?

To earn money

2. What are some factors you should consider when investing your money?

How easily you can get to your money, how safe/risky it is, the interest rate

3. What does diversification mean?

Investing in different types of investments (not just stocks)

4. What does liquidity mean?

How easily you can get to your money

5. What do most Americans invest in? Why?

Moderate risk investments, mutual funds, stocks, etc. Because they are safe but still earn a little money.

6. What level of risk do most people avoid when they invest? Why?

Aggressive—people don’t want to run the risk of losing everything

7. Fill in the chart below with some information about each type of investment personality:

Conservative / Moderately Conservative / Moderate / Moderately Aggressive / Aggressive
People who don’t have a lot of $$ (live paycheck to paycheck or retired); should invest in savings, CDs, money market accounts (no risk) / People who can tolerate just a little more risk; should invest in blue chip stocks, real estate, bonds, etc. / **most common**; People who have enough $; People who are saving for college or retirement; should invest in bonds, stock market, S&P 500 (Buy & Hold) / People who make more $$ & have more to invest; should invest in more aggressive bonds & mutual funds / Mostly young people with money to lose/risk-takers

8. What happens to your investment personality as you get older?

Generally become more conservative

9. With risk comes reward.

10. Do CDs and Money Market accounts keep up with inflation?

Not really

11. What is a Fixed Income Annuity?

You pay a lump sum of money and in return you are guaranteed a certain amount of income until you die—low-risk investment

12. What is a bond?

Like a fancy IOU—you lend money to the issuer for a specific period of time & interest rate

13. What is a coupon bond?

A bond where interest is paid every 6 months and principal is paid back at maturity

14. What is a zero coupon bond?

No interest is paid until maturity

15. What does face value mean?

The price of the bond

16. What does “issuer” mean?

The person/company/government who is giving the bond

17. What is the maturity date?

When the bond is “over”; when it reaches full value

18. What is a Fixed Income Security?

An investment that pays fixed interest payments and returns the principal at the maturity date

19. What are government bonds?

Bonds issued by any type of government

20. What are municipal bonds?

Bonds issued by local governments

21. What are US Treasury bonds? What are the different types of these?

Bonds issued by the American government—they are the safest!
Bonds, notes, and bills are the three types.

22. Why are government bonds considered safe?

Because it is highly unlikely that the gov’t will collapse be unable to pay them back.

23. Why are corporate bonds considered risky?

Because there is a chance that the company will file for bankruptcy & not pay them back

24. What are investment grade bonds?

Bonds issued by highly-rated companies (ex: Google)

25. What is the difference between a Bill, Note, and Bond?

Bills are short-term (days – 1year) and are zero coupon bonds; Notes are 2-10 years and are coupon bonds; Bonds can be up to 30 years and are coupon bonds.

26. Can bonds be sold before maturity?

Yes

27. How aggressive is bond trading generally? Can it ever be different?

It is usually safe, but can be aggressive when selling them before maturity

28. What is the government’s role in the bond market?

The gov’t can use bonds to control interest rates & inflation

29. Are bonds connected to interest rates?

Yes, especially when selling them before maturity

30. What is a mutual fund? How is it different from what we did in class?

A pool of money invested into a variety of types of investments. In class, we made funds out of only stocks, but real mutual funds include bonds, real estate, etc.

31. What are some kinds of mutual funds?

Stock funds, bond funds, money market funds, income funds, real estate funds (or a combination of any of these)

32. What is an index fund? Why would someone choose this? Give an example of an index fund.

Index funds follow already-created groups of stocks. They have the least amount of fees and are very diversified. For example: there are funds that follow the S&P 500 or the Dow Jones.

33. How does the return on an index fund compare with other mutual funds?

Lower returns because they are lower risk

34. Why do some people not like mutual funds?

Loss of control, fees

35. How do the fees on mutual funds compare with other investment advisors?
mutual funds higher fees

36. What are some examples of retirement accounts?

IRA, Roth IRA, 401K

37. Why do people invest in retirement accounts?

To save money when they are investing (you don’t pay taxes until you take the $$ out)

38. What is a 401K?

A retirement account through your employer

39. Why is tax deferral a good thing for retirement accounts?

Most people have a lower tax rate when they retire

40. Is there a limit to how much you can contribute to a 401K?

Yes—it changes every year

41. What does it mean to “roll over” your 401K?

When you change jobs, you can put the $$ from your old 401K into your new one

42. What is employer matching?

When an employer opts (it is not required) to put money into your 401K

43. What is the difference between an IRA and a Roth IRA?

Roth IRA has an income requirement, IRA does not

44. How are most 401Ks invested?
mutual funds