Module 3 Review

A profit from the sale of financial investments is called ___________.

• capital profit

• capital gains

• super earned income

• magic money

Answer explanation

Capital gains are profits earned from investment sources. These profits are not considered earned income and are often taxed at a different tax rate.

A share of a company's net profits paid to the people who own company stock (often called stockholders or shareholders).

• bonus

• dividend

• capital gains

• stock option

Answer explanation

A dividend is a share of company profits paid to people who own stock in the company. Dividends are often issued to get stockholders excited about the company and to raise stock prices.

Money in a savings account at a bank or credit union will typically earn _______.

• dividends

• capital gains

• interest

• cobwebs

Answer explanation

Money earned on the money you deposit in a savings account is called interest. Rates for interest will vary and different banks/credit union can offer different rates. The amount of money in the account can also impact the interest rate.

Jim has $1,000 deposited into a 12 month CD at his local bank. The CD is earning 2% in simple interest. How much money should Jim expect to receive in 12 months?

• $1,200

• $1,020

• $1,220

• $1,000

Answer explanation

The formula for calculating simple interest is I = prt. I is the interest. P is the principal (deposit). R = annual interest rate. T = time in years.

Having access to your money and the ease of that access is called _____.

• liquidity

• ATM fees

• capital gains

• full refund features

Answer explanation

Liquidity is about the ease of access to one's money when it is saved or invested. Different financial products/vehicles have differing degrees of liquidity.

George has $500 left over from his summer earnings to put away for a vacation next summer. He is confident he will not need to spend the money on anything else in the next 12 months. Which option is likely the best place for George to put this money?

• Common stocks in a strong US based company

• 10 year US Treasury Bonds

• A 12 month Certificate of Deposit (CD) paying 2.5% interest

• A simple savings account currently paying 1.25% interest

Answer explanation

As long as George will not need the money until next summer, he should take the financial vehicle with the best fixed rate of return. The stocks represent too much risk for the time period stated. The US bonds would lock up his money for 10 years. The savings account does not offer as high an interest rate as the CD.

Kara currently owns 100 shares of American Film Company stock. The company has just announced a dividend of $5 per share. How much money will Kara earn in dividends?

• $500

• $5,000

• $5

• $250

Answer explanation

Dividends are paid per share not per shareholder. Meaning the more shares (stocks) a person owns in a company that is paying a dividend, the more actual money that person will make from that stock. In this case, you simply take the dividend ($5) x the number of share Kara owns (100).

Laura is trying to set up her retirement account at work through the company's 401k. If she has 30 years or more before she plans to retire, what financial product likely represents the best mix of potential for return with suitable risk?

• Putting 100% of her money in her employer's stock

• Putting 50% of her money in bonds and 50% in a money market fund.

• Putting her money in a diversified portfolio that is primarily invested in equity based mutual funds.

• Putting 100% of her money in cryptocurrencies.

Answer explanation

Since Laura has several decades before retirement, she wants to be careful about inflation and reduced purchasing power. This means she needs to take some risk and have money in the equity (stock) market. Mutual funds will give her the best option to do this. Putting all her money in her employer's stock could be risky and represents putting "all your eggs in one basket."

The biggest difference between a Roth IRA and a Traditional IRA is that with a Roth IRA ______.

• you have to be at least 30 years old to start one

• qualified distributions are tax-free.

• qualified distributions are considered capital gains.

• they are only available to people who make over $100,000 a year.

Answer explanation

Both are types of Individual Retirement Accounts (IRA). With a Roth IRA, qualified distributions (those made after you turn 59 1/2 years old) are tax-free. Distributions from a Traditional IRA are subject to ordinary income tax.

A pooled collection of assets that invests in stocks, bonds, and other securities is called a ________.

• Corporate Bond

• Government Bond

• Super Fund

• mutual fund