1.
The average stock market return spanning the 86 years from 1926-2012 has approximated 9%. According tp the Rule of 72, how often will an individual's investment double in that time?
Correct Answer
B. Every 8 years
Explanation
The Rule of 72 is a quick way to estimate how long it will take for an investment to double in value. It states that by dividing 72 by the annual rate of return, you can get an approximate number of years it will take for the investment to double. In this case, since the average stock market return is approximately 9%, dividing 72 by 9 gives us 8. Therefore, an individual's investment will double approximately every 8 years.
2.
Jacob has $5,000 that he has saved from doing odd jobs around the neighborhood. When he graduates from college in four years, he would like to have $10,000 to use as a down payment on a new car. If Jacob is going to realize his dream, what interest rate will he have to invest his money at?
Correct Answer
A. 18%
Explanation
Jacob has $5,000 and wants to double it to $10,000 in four years. To determine the interest rate he needs, we can use the compound interest formula: A = P(1 + r/n)^(nt), where A is the final amount, P is the principal amount, r is the annual interest rate, n is the number of times the interest is compounded per year, and t is the number of years. In this case, P = $5,000, A = $10,000, and t = 4. By rearranging the formula and substituting the given values, we can solve for r. The only answer choice that matches the calculated interest rate is 18%.
3.
A deferred compensation plan, such as a 401(k) _____
Correct Answer
D. All of the above
Explanation
A deferred compensation plan, such as a 401(k), is an arrangement between an employer and employee where a portion of the employee's pay is withheld and paid out at a future date with earnings. This plan allows an employee to make pre-tax contributions to an account, which may be matched by the employer. Additionally, it pushes the tax liability to a future date when the money is withdrawn. Therefore, all of the above statements are true.
4.
This type of savings vehicle requires a minimum amount to open, has a short term, and restricts the number of withdrawals you can make.
Correct Answer
C. MMA
Explanation
A Money Market Account (MMA) is a type of savings vehicle that requires a minimum amount to open, has a short term, and restricts the number of withdrawals you can make. This type of account typically offers higher interest rates than a regular savings account and provides more flexibility than a Certificate of Deposit (CD) or an Individual Retirement Account (IRA). Therefore, MMA is the correct answer.
5.
Which of the following is most liquid?
Correct Answer
C. Savings account
Explanation
A savings account is the most liquid option among the given choices. Liquidity refers to the ease with which an asset can be converted into cash without causing significant price changes. A savings account allows individuals to deposit and withdraw money easily, without any penalties or restrictions. On the other hand, a certificate of deposit (CD) has a fixed term and early withdrawal may result in penalties. A money market account also has limitations on the number of transactions and may require a minimum balance. Therefore, a savings account provides the highest level of liquidity compared to the other options.
6.
The strategy that maximizes your return with CD laddering involves the following:
Correct Answer
A. Spreading money across several CDs that have different term or maturity dates
Explanation
The correct answer is spreading money across several CDs that have different term or maturity dates. This strategy allows for diversification and reduces the risk of having all the funds locked in one CD. By laddering the CDs, you can take advantage of higher interest rates as longer-term CDs usually offer higher returns. Additionally, shopping the market for the best rates ensures that you get the most favorable terms for your investments.
7.
What is the relationship between the interest rate and liquidity of savings vehicles/
Correct Answer
B. Higher interest rates are offered in exchange for lower liquidity.
Explanation
The relationship between the interest rate and liquidity of savings vehicles is that higher interest rates are offered in exchange for lower liquidity. This means that when savings vehicles have higher interest rates, they typically have less flexibility or accessibility for withdrawing funds. In other words, if someone wants a higher return on their savings, they may have to accept less immediate access to their money.
8.
The strategy that maximizes your return with CD laddering involves the following:
Correct Answer
A. Spreading money across several CDs that have different maturity dates.
Explanation
The correct answer is spreading money across several CDs that have different maturity dates. This strategy, known as CD laddering, allows for diversification and flexibility. By investing in multiple CDs with varying maturity dates, you can ensure that you have access to a portion of your funds at regular intervals while still benefiting from higher interest rates on longer-term CDs. This strategy also allows you to take advantage of potential rate increases in the future by reinvesting the funds from maturing CDs into longer-term ones. Overall, CD laddering maximizes your return by balancing liquidity and higher interest rates.
9.
Contributions to a deferred compensation plan, e.g., 401(k) plan, are made with after-tax dollars.
Correct Answer
B. False
Explanation
Contributions to a deferred compensation plan, such as a 401(k) plan, are not made with after-tax dollars. In fact, these contributions are typically made with pre-tax dollars, meaning that the money is deducted from an individual's salary before taxes are calculated. This allows individuals to reduce their taxable income and potentially lower their overall tax liability. Therefore, the correct answer is False.
10.
What is the most significant distinction between a traditional IRA and a Roth IRA?
Correct Answer
B. Retirement-age withdrawals are taxed on a traditional IRA, but not on a Roth.
Explanation
The most significant distinction between a traditional IRA and a Roth IRA is that retirement-age withdrawals are taxed on a traditional IRA, but not on a Roth. This means that when an individual withdraws money from a traditional IRA during retirement, they will have to pay taxes on the amount withdrawn, whereas withdrawals from a Roth IRA are tax-free. This key difference impacts the overall tax implications and potential benefits of each type of account for retirement planning.
11.
EE and I Bonds offer the following benefits:
Correct Answer
D. All of the above
Explanation
EE and I Bonds offer the benefits of having interest that is exempt from local, state, and federal taxes if used for qualifying educational expenses. Additionally, they earn interest for up to 30 years and can be redeemed at any time after the initial 12-month holding period. Therefore, the correct answer is "all of the above."
12.
Saving vehicles by definition are designed to minimize risk versus investment vehicles which tend to have greater earnings and risk potential.
Correct Answer
A. True
Explanation
Saving vehicles are designed to minimize risk, meaning they are intended to provide a safe and secure way to save money. On the other hand, investment vehicles, such as stocks or mutual funds, tend to have greater earnings potential but also come with higher risk. Therefore, the statement that saving vehicles are designed to minimize risk compared to investment vehicles is true.