Interest, Inflation, & Returns
What is compound interest?
Interest earned on both the original principal and the interest previously added to it.
What type of investment represents partial ownership in a public corporation?
Stock
What is the main advantage of investing in a mutual fund?
It provides instant diversification and professional management by combining money with other investors to buy a mix of stocks and bonds.
What is a scam where early investors are paid off using money from newer investors in a non-existent business?
A Ponzi scheme
What is the original amount of money saved or invested before earning interest called?
Principal
What is a government bond?
An IOU or loan agreement where an investor lends money to the government in exchange for guaranteed payout with interest.
What is diversification?
What is the practice of spreading investments across various assets, industries, and regions to reduce risk called?
What type of scam involves spreading false information to artificially drive up a stock’s price before selling off shares at the high price?
A "Pump and Dump" scheme
How do you calculate the real return on an investment?
Subtract fees, taxes, and inflation from the nominal return.
What type of investment earnings are completely exempt from state and local taxes?
Interest earned on U.S. government bonds
What is the investment strategy of regularly investing a fixed dollar amount regardless of whether share prices are high or low?
Dollar cost averaging
What type of scam asks a target to pay money upfront before receiving a promised payout that never arrives?
An advanced-fee scam
If an investment earns a nominal return of 12% and inflation is 4.5%, what is the real rate of return?
7.5%
What are the two ways stock owners earn money from their investment?
Capital gains:(selling for more than the purchase price)
Dividend payments: (A portion of a company's profits paid out directly to its stockholders.)
How does dollar cost averaging help reduce an investor's overall risk?
It helps lower the average purchase price per share over time and removes emotional decisions or market-timing guesswork.
Why are options and futures considered inappropriate investments for first-time or low-risk investors?
They are highly complex and carry a very high level of financial risk.
What is the primary danger or drawback to keeping money in a standard savings account over a long period?
The rate of inflation may be higher than the interest rate, causing the money to lose purchasing power over time.
What are 2 benefits of government bonds?
-No income or state taxes on the interest
How should an investor's portfolio asset allocation generally shift as they get older?
They should shift from high-risk growth assets (like stocks) toward lower-risk, conservative income assets (like bonds and money market funds).
Why does a Ponzi scheme eventually collapse?
It relies on a continuous supply of new investors to pay off previous investors, so it falls apart when no new money comes in.