Basics Beginner: Investments

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1.
What results when you sell an investment for more than you paid for it?
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A capital gain. It can be thought of as a gain on the capital invested.
2.
Compound interest is interest that is calculated only on the principal you invest.
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False. Compound interest is interest that is calculated on the principal you invest plus any interest you earn.
3.
What is time horizon?
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The length of time over which you will be investing your money. Your time horizon will be a factor when choosing investments.
4.
In mutual funds, a sales charge is used to compensate the mutual fund manager.
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False. It is to compensate the financial advisor for providing advice. The expense ratio is what compensates the mutual fund manager.
5.
If you own a bond with an interest rate of 4% and rates increase to 5%, what will happen to the value of the bond if you try to sell it?
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It will decrease. If interest rates rise, the price of the bond on the market will decline because investors will seek bonds with these new, higher rates. This occurs with US government bonds too, and if you were to sell it before it matures, you would sell for less than you invested. If you hold the US government bond until its maturity date, you will receive all of your principal back.
6.
The interest you earn on a savings account or similar cash investment is not taxed as ordinary income by the federal government.
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False. Interest is taxed as ordinary income at both the state (if you are required to pay state taxes) and federal levels.