Basics Beginner: Investments

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1.
The primary risk associated with cash investments is _______.
Choose wisely. There is only one correct answer.
Inflation. Cash investments provide safety of principal and liquidity. But because of this, they offer a very low rate of return, often lower than the rate of inflation.
2.
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?
Choose wisely. There is only one correct answer.
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.
3.
During your working years, what do you need your investments to do the most of for you?
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Grow. If you are like most people, you will need your investments to grow so that when you are older, you can withdraw sufficient money from them to live on.
4.
As a general rule, which type of investment earns the highest rates?
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Stocks. As a rule, stocks earn the highest rates because their returns are not fixed. Of course, they also have the highest risks.
5.
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.
6.
If an investor has a time horizon of 18 months to invest for a specific goal, they should consider investing what percentage of their investment dollars in stocks?
Choose wisely. There is only one correct answer.
0%. In general, 18 months is too short a time period to invest in stocks due to the chance for short-term price swings. You increase the risk of loss if you have a short timeline until needing to sell your stock investments. A general rule when buying stocks is that investors should be willing to hold stocks for five years or longer.