Financial Literacy Unit 3 Test

Unit 3 of Financial Literacy Online Summer Course

What are considered investments?

Mutual funds, stocks, and bonds are considered investments because you purchase them to make a profit.

What is the risk associated with investments?

You could lose money on your investments depending on how risky they are.

Why are savings accounts not considered investments?

Savings accounts and certificates of deposit are not considered investments because you can't buy or sell them to make a profit and there is very little risk of losing the money.

What income do savings accounts generate?

The money in a savings account earns interest income, generally less than 1%.

What does it mean that savings accounts are liquid?

Savings accounts are liquid, meaning you can withdraw the cash easily if needed.

How is the money in savings accounts protected?

The funds in savings accounts are insured by the Federal Deposit Insurance Corporation (FDIC).

What is the primary goal of investing?

Investing involves buying something that you expect will increase in value and that you can sell for a profit.

What are some examples of investments besides stocks?

You can invest in homes and artworks.

Why do parents invest in their child's college fund?

Parents choose to invest early in their child's college fund to help the money grow over a longer period of time.

What major purchases might individuals invest for?

Individuals and families invest for things like a down payment on their first home or other major purchases.

What is the benefit of investing early for retirement?

Investing early and regularly contributing to a retirement account helps the funds grow for retirement.

What does it mean to leave an estate to heirs?

Investing to ensure loved ones remain financially secure for their lifetime and letting the money grow to will it to heirs.

How can investing lead to financial freedom?

Investors who make the right investments can make enough money to live on for the rest of their lives.

What is one way investors 'play' the stock market?

They buy and sell stocks and bonds to make trading profits.

What is another type of investment besides stocks and bonds?

Purchasing real estate and renting it out or selling it for a profit.

What is the minimum retirement age?

The minimum retirement age is the age at which individuals typically decide to retire.

What is a common reason for individuals to invest?

To achieve financial goals such as retirement, education funds, or major purchases.

What is the relationship between risk and different types of investments?

Different investments carry different risks, so individuals should analyze their financial goals before investing.

What is the importance of analyzing financial goals before investing?

It helps individuals decide on a savings and investing plan that aligns with their objectives.

What can happen to the value of investments?

The value of investments may increase or decrease depending on market conditions.

What is meant by 'trading profits'?

Trading profits refer to the gains made from buying and selling investments like stocks and bonds.

What is the significance of regular contributions to retirement accounts?

Regular contributions help grow the funds needed for a comfortable retirement.

What is the purpose of investing for many individuals?

To ensure financial security for themselves and their loved ones.

What is the primary goal for some people who choose to invest?

To achieve financial freedom, allowing them to quit their jobs or start their own businesses.

What is the risk associated with savings accounts compared to investments?

The risk of losing money in a savings account is very small due to government insurance.

What does the Federal Deposit Insurance Corporation (FDIC) insure in savings accounts?

Deposits up to $250,000 per account.

What is liquidity in the context of savings accounts?

Liquidity refers to the ability to withdraw money from the account at any time.

Why are savings accounts considered ideal for emergency funds?

They are very safe and allow for easy access to funds when needed.

What type of interest do savings accounts typically earn?

Savings accounts earn compound interest.

What is compound interest?

Interest earned not only on the initial deposit but also on the interest income that is periodically added.

What are some common uses for savings accounts?

To hold funds for emergencies or to save for large purchases.

What is a basic savings account?

An account that safeguards money with a low minimum deposit and typically a low interest rate.

What is a youth savings account?

A savings account with a low minimum balance requirement designed to help young people learn about saving.

What is a certificate of deposit (CD)?

A safe investment that offers a higher interest rate than a savings account but requires keeping money in the account for a specified time.

What are the typical terms for a certificate of deposit?

Usually between six months and five years.

What happens if you withdraw money from a CD before the term ends?

You will pay a penalty fee that reduces any interest earned.

What is a money market account?

A savings account that offers variable interest rates based on market conditions but may have withdrawal restrictions.

What are common restrictions associated with money market accounts?

Limits on withdrawals or transfers, often capped at six per month.

What is an online savings account?

A savings account with a low minimum deposit requirement and higher interest rates due to lower overhead costs.

How do online savings accounts differ from traditional savings accounts?

They typically offer higher interest rates because they do not have the same overhead costs as traditional banks.

What is one advantage of a basic savings account?

Funds can be withdrawn anytime, making them available on demand.

What is one disadvantage of a basic savings account?

It may have the lowest interest rate, typically less than 1 percent.

What is the purpose of having a youth savings account?

To help young people learn about saving and the importance of managing money.

What is the relationship between savings accounts and emergency funds?

Savings accounts are ideal for emergency funds because they are safe and provide easy access to cash.

What are some investment options mentioned besides savings accounts?

Stocks, bonds, mutual funds, real estate, precious metals, and new business ventures.

What are the withdrawal restrictions typically associated with Money Market Accounts?

Many money market accounts limit withdrawals to six per month.

What happens if you withdraw money from a Certificate of Deposit before maturity?

You will pay a penalty fee that reduces any interest earned.

What are Stocks?

Shares of ownership in a company, where stockholders may receive dividends if the company pays them.

What is the relationship between the number of shares owned and equity in a company?

The more shares of stock a person owns, the more equity they have in that company.

What is a Bond?

A type of debt where consumers lend money to companies or governments, earning interest (coupon rate) until the bond's maturity date.

What is the difference between a government bond and a corporate bond?

A government bond is a treasury bond issued by the government, while a corporate bond is issued by a company.

What happens when a bond reaches its maturity date?

The bond issuer pays the debt in full, and the bondholder receives the face value of the bond back.

What are Mutual Funds?

Investment vehicles that combine stocks and bonds from several companies or governments, allowing investors to diversify their risk.

What is the purpose of a Mutual Fund?

To diversify risk or level out the risk for investors.

What is the role of a money manager in a mutual fund?

An experienced money manager or group of managers chooses the stocks and bonds that go into the mutual fund and manages the fund for a specified goal.

What are the two main types of mutual funds based on investment goals?

Some mutual funds are for high growth, whereas others are for stability.

What is a rental property?

A rental property is an investment property that an investor buys and charges people to rent, which may include apartment buildings, office buildings, or houses.

What is property flipping?

Property flipping is an investment strategy where an investor buys a run

Why do individuals and businesses invest in real estate?

They believe the value of the properties will grow in the future, allowing them to sell and make profits.

What are precious metals considered in terms of investment?

Precious metals like gold and silver are considered investments because they are rare and likely to hold value.

What is the role of entrepreneurs in business investments?

Entrepreneurs start up a business or buy an existing business, taking the risk of potential financial loss in hopes of making a profit.

Who are limited partners in a business investment context?

Limited partners are individuals who invest money into a business in exchange for equity and profit but do not engage in day

What are some examples of safer savings options compared to investments?

Safer savings options include certificates of deposit (CDs) and money market accounts.

What is short

term debt traded in the money market?

What are some instruments used in the money market?

Instruments include deposits and collateral loans.

What is a stockholder?

A stockholder is an investor who owns a portion of a company through shares of stock.

What is an initial public offering (IPO)?

An IPO is when companies issue securities (stocks and bonds) to investors for the first time.

Why are stocks considered risky investments?

Stocks are risky because their market prices fluctuate daily.

What is the potential return of stocks compared to other investments?

Despite volatility, stocks have the greatest potential for considerable returns if viewed as long

How do certificates of deposit and bonds compare to stocks in terms of safety and interest?

Certificates of deposit and bonds are very safe investments but do not earn much interest.

What is the liquidity of savings accounts?

Savings accounts are liquid accounts, allowing quick conversion of savings into cash.

What are the two key factors to consider when choosing a savings account?

Liquidity and interest rate.

How is simple interest calculated?

Simple interest is calculated once on the starting principal: Total Interest = Principal × APR (as a decimal) × Duration.

What does the formula A = P(1 + rn)nt represent?

This formula calculates the total amount in the account or balance, where A is the total amount, P is the initial deposit, r is the APR as a decimal, n is the number of times interest is compounded per year, and t is the number of years the principal is saved.

What are the characteristics of a Basic Savings Account?

Fairly liquid, withdrawals restricted to six per month, very low interest rate (national average is 0.06%).

What is the national average interest rate for a Money Market Account?

The national average is 0.07%.

What are the key features of a Certificate of Deposit (CD)?

Not very liquid, penalty fee for premature withdrawal, highest interest compared to other savings options, terms range from six months to five years, national average is 0.17% for one

How does the interest rate of a Basic Savings Account compare to that of a Certificate of Deposit?

A Basic Savings Account offers the lowest interest rate, while Certificates of Deposit offer the highest interest rate.

What is investment risk?

Investment risk is the likelihood that the investment asset will lose value.

What does liquidity measure in investments?

Liquidity measures how quickly an investment can be converted to cash.

Which investments are more liquid: stocks and bonds or precious metals?

Stocks and bonds are more liquid than precious metals because they are tradable securities.

What is the return on an investment?

The return on an investment is the investor's gain or loss on the investment over a period of time.

What are dividends?

Dividends are income that investors earn when a company distributes a portion of its profits to its stockholders.

What are capital gains?

Capital gains are income earned from buying and selling investments, such as stocks sold at higher prices.

What is interest income?

Interest income is income from investments like bonds, providing regular income based on a preset interest or coupon rate.

What is an Individual Retirement Account (IRA)?

An IRA invests in stocks, bonds, and mutual funds, with contributions made using taxed funds and tax

What is a Roth IRA?

A Roth IRA is a type of IRA where distributions upon retirement are tax

What is a 401(k)?

A 401(k) is a retirement plan offered by employers where employees contribute a portion of their pre

What is a 403(b)?

A 403(b) is a retirement plan for government, public school, and non

What is the tax treatment of contributions and distributions for an IRA?

Contributions are made after tax and are tax

How are contributions and distributions treated in a Roth IRA?

Contributions are made after tax and are not tax

What is the tax treatment for a 401(k)?

Contributions are made pre

What is the tax treatment for a 403(b)?

Contributions are made pre

Why is investing in stocks considered risky?

Investing in stocks is risky because market prices change constantly, and you may not be able to sell them for what you bought them for.

What are blue

chip stocks?

What is revenue sharing in mutual funds?

A fee where the management company pays other brokers to market the investment.

What is the Rule of 72?

A formula used to calculate the length of time it will take an investment to double, based on the rate of return.

How does the Rule of 72 work?

72 divided by the rate of return equals the number of years for the investment to double.

If you invest at a 2% annual interest, how long will it take to double your investment?

36 years.

How long will it take to double your investment at a 3% interest rate?

24 years.