Unit 5.2 & 5.3

Which would be the best interest instrument to buy (highest returns) when interest rates are high?

• long-term bonds

• variable-rate loans

• stocks

Answer explanation

Bonds have a fixed rate coupon (interest rate), so if:

you buy a bond when rates are high -->

you will “lock in” a high rate as a bondholder -->

you will receive higher income (returns) from the bond —which is a benefit.

You should not sell your stocks when interest rates are high because…?

• stocks gain value when interest rates are high.

• Stocks lose value when interest rates are high.

• Investors move their money to interest-bearing instruments.

• Both blue and yellow are correct.

One example of a long-term retirement goal is to:

• stop using credit cards.

• close your savings accounts.

• deposit at least $100,000 into a retirement account.

• invest in high-risk securities.

The main source of income for retired people is…?

• rents

• profits from business

• pension and social security

• salaries, wages, tips

After five years of owning a Roth Individual Retirement Account (IRA), a person wants to buy his first home. He can withdraw the money from the Roth IRA…?

• tax and penalty free.

• but must pay a penalty at the time of withdrawal.

• and have penalties deferred until retirement.

• but must pay taxes on it.

Answer explanation

The IRA holder does NOT have to pay penalty to withdraw funds for:

1. education,

2. purchase of a first home,

3. medical emergencies.

Roth IRA contributions are deposited after-tax, so the withdrawal is also tax-free.

Ben's annual income is $30,000, and he contributed $3,000 to a traditional IRA in his local bank. What is his taxable income?

• $33,000

• $27,000

• $30,000

• $0 because he contributed to an IRA

Answer explanation

You deduct (subtract) your IRA contributions from the annual income from your job.

annual income - IRA contributions = taxable income

$30,000 - $3,000 = $27,000

Which two are investment products?

• a certificate of deposit

• a corporate bond

• an initial public offering of stock

• a new car

Answer explanation

Stocks and bonds are securities.

--> securities are capital assets

--> capital assets are investment products.

Certificates of Deposit (CDs) are not investments - they are savings products.

Sara has invested in corporate bonds that…?

• are issued by government.

• are loans with ownership privileges.

• return the face value of the bond at maturity minus the interest payments.

• are loans to the issuer of the bond.

Answer explanation

Corporate is not government; corporations are separate from government.

Bonds do NOT have ownership privileges, stocks do.

Bonds are loans that return the face value at maturity PLUS coupon interest during the life of the bond.

When an investor buys a zero-coupon bond, the investor...?

• receives the interest in a lump sum when the bond matures.

• agrees to obtaining a bond with a variable interest rate.

• purchases the bond at a discount from the face value of the bond.

• is buying a series of bonds that mature at different times.

Answer explanation

Bonds that have a coupon pay the interest regularly during the life of the bond, not in a "lump sum" (all together) at maturity.

Zero-coupon bonds have zero interest (no coupon).

Bondholders buy zero-coupon bonds at a discount from (less than) the face value of the bond.

Which of the following investment products is guaranteed by the federal government…?

• common stock

• U.S. Treasury notes

• corporate bonds

• referred stock

Answer explanation

Treasury Notes and Treasury Bill are federal government bonds.

Municipal bonds are from state and local governments.