Personal Finance Ch.11

What is the first question to ask yourself when deciding whether to save or invest?

When will I need the money?

You just received a $5,000 gift from your rich uncle and you don’t know whether to invest or save the money. You want to use the money to help purchase a new car in four years. Where should you invest the money?

In a safe, insured, guaranteed investment

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

Savings account

Savings:

All of the above; Should be used for accumulating enough money to cover day-to-day expenses, will not necessarily make you rich but keep you from being poor, should consist of three to six months of income

Which instrument does not have a zero default risk for a $100,000 investment?

A mutual fund account

Inflation:

Is the overall increase in the price of goods and services over time

What proportion of your income should you have in savings?

3-6 months

The general rule of thumb is the ___ the risk, the ___ the return will be.

a and d; higher;higher, lower;lower

For people to invest in riskier investments, the investment must pay a(n) ___ to offset the risk.

Risk premium

Default risk:

All of the above; is the risk that a firm in which you have invested will declare bankruptcy and your investment will become worthless, should be calculated as part of your risk premium, is zero for FDIC- and NCUA-insured accounts up to $250,000.

Interest rate risk:

Is the risk associated with an increase or decrease in interest rates

Market risk:

All of the above; is the risk that the value of your investment will decrease due to changes in the market, increases when the market has dramatic swings in prices from highs to lows, should be calculated as part of your risk premium

Liquidity risk:

Is the risk that you will not be able to case out your investment quickly enough to either meet your cash flow needs or prevent a loss

Risk tolerance for savings and investments:

Is dependent on the individual

According to the investment pyramid, a person with high risk tolerance who is looking to invest money for the long-term might invest in ________ to maximize the possibility of a high return.

Precious metals

The base of the investment pyramid consists of

U.S. Treasury securities, insured savings, checking accounts, certificates of deposit, and U.S. savings bonds

The investment pyramid:

is a classification for investments based on their risk

You should evaluate your investments:

at least once a year or any time there is a major life change

Which instrument is not typical for someone in the independent personal finance life stage?

529 college savings plan

Which life stage is the best time to start putting money into a Roth IRA to start building your retirement fund?

Independent

What is the impact of a savings account’s purchasing power if it is earning 3% APY and inflation has been 4% for the past year?

The impact is a decrease in purchasing power. When inflation is higher than your earnings rate then your real rate of return is negative. Even though your account balance is higher based on the number, it is lower cause the larger the amount can actually buy less than your original balance a year ago.