As I grew
into my teenage years, I learned my first big lesson in family financing. I learned that most people had no clue what
the hell they were doing when it came to savings and investing. That is still true today and is the reason
why many people are taken advantage of by banks, insurance companies, and
brokerage firms.
The first
thing you should be concerned about when saving or investing money is the
amount and kind of risk that you are taking.
1. Let’s start with Mr. Smith, a 27 year
old Home Heating and Cooling Specialist that wants to start an IRA for himself.
He wants to take $1,000 per month from his pay for his investments. He also
wants to take the $2,000 from his tax return every year and add it to his
$1,200 per year savings.
2. Mr. Smith wants to add his money into
his IRA once a year. To safe guard his money throughout the year; he placed his
money into an intermediary. What is an intermediary?
A. A financial intermediary is a financial
institution that
connects surplus and deficit agents. The classic example of a financial
intermediary is a bank that consolidates bank deposits and uses the funds to transform them into bank loans.
B. A brokerage firm that is separate
from banking.
C. None of these
D. Both of these
3. Mr. Smith wants to make sure that his
savings are insured in case of a banking collapse. He checks to see if they
have;
A. SPIC
B. FDIC
C. SIPC
D. DFIC
4. If Mr. Smith has the insurance above
and he has $100,000 in the bank and the bank goes out of business, he will get
back
A. $200,000
B. $75,000
C. $100,000
D. $99,000
5. Mr. Smith moved his money after the
first year, $3,200 to a well-known international brokerage firm located in New York that is in the
top 5 firms in the world. He asked if they have insurance. What insurance is he
asking that they have?
A. SPIC
B. FDIC
C. SIPC
D. DFIC
6. Mr. Smith checks the firm’s fee
schedule to see if the fees are in line with what he wants to pay knowing that
every brokerage firm sets different fee rates and schedules. Fees will be different for;
A. Stock
B. Bonds
C. Mutual Funds
D. All of these
7. His broker told him that he will be
safe if he bought into a "Retirement Date Funds" or "Target
Fund." This fund;
A. Makes investments in other
mutual funds that buy individual stocks and bonds.
B. That matures on a given date
C. That targets profitable companies
D. None of these
8. Some (one) of the fee(s) he found in
a Target Fund can be;
A. a 12-1b fee
B. a sales load or commission for
investing in the fund
C. None of these
D. Both of these
9. Mr. Smith is opening a Traditional
IRA. That means on a bond mutual fund, it is not a very intelligent thing to do
to buy municipal bonds in that fund as you are already exempt with municipal
bonds from taxation on the interest income!
True
False
10. A Corporate Bond and a Mutual Fund is
the same thing.
A. Yes, they both mature
B. No, only bonds mature
C. Yes, they both give monthly interest
D. Yes, they both give interest at the
end of the year.
11. A stock carries more market risk than
bonds.
True
False
12. An “AAA” bond carries more business risk than
“A” bonds?
True
False
13. More than likely, a “BB” bond gives
higher interest than an “AAA” bond.
True
False
14. A bond that matures in 4 years has
less interest rate risk than a bond that matures in 10 years.
True
False
15. A bond that matures in 4 years has
less inflation risk than a bond that matures in 10 years.
True
True
16. A bond that matures in 4 years has
less market risk than stocks.
True
False
17. Mr. Smith meets an insurance broker
at his son’s football game. He says that he can give him an annuity investing
his money in a junk bond fund that will give him $1,000 per month guaranteed
for the rest of his life, if he gives Mr. Smith $300,000 today. Does this rate
of return sound right?
A. Yes because that rate comes to 4% per
year.
B. No because that rate comes to 4% per
year.
C. He can make more money than that.
D. Take it and run!
18. Would it be smart to put this annuity
into Mr. Smith’s IRA?
Yes
No
19. What type of product is this annuity?
A. Banking
B. Insurance
C. Brokerage
D. None of these
20. Instead of buying an annuity, Mr.
Smith can invest his money into several individual Junk Bonds over several
years and achieve a higher return than the annuity. That is because the company
overseeing the management of Mr. Smith’s annuity must pay expenses from his
portfolio.
True
False
21. The money in Mr. Smith's bank account carries no risk.
True
False
22. Mr. Smith's bank account carries inflation and interest rate risk.
True
False
Answers
1. A
2. A
3. B
4. C
5. C
6. D
7. A
8. D
9. True
10. B
11. True
12. False
13. True
14. True
15. True
16. True
17. A
18. No
19. B
20. True
21. False
22. True
If you got
more than 9 wrong, you better read up on my financial blogs before committing
money for long term savings and investment.
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