#1
Which of the following is considered a short-term investment?
Certificate of Deposit (CD)
ExplanationCDs are time deposits with fixed interest rates and maturity dates, typically considered short-term.
#2
What does APR stand for in the context of loans and credit cards?
Annual Percentage Rate
ExplanationAPR represents the total cost of borrowing, including interest and fees, expressed as a yearly percentage.
#3
Which of the following is an example of a liquid asset?
Savings account
ExplanationLiquid assets, like a savings account, can be quickly converted to cash without significant loss of value.
#4
What is the purpose of an emergency fund?
To cover unexpected expenses
ExplanationEmergency funds provide a financial safety net, covering unforeseen expenses and preventing the need to dip into long-term investments.
#5
Which of the following is NOT a common type of retirement account?
529 plan
Explanation529 plans are used for education savings, not retirement; common retirement accounts include 401(k), IRA, etc.
#6
What does the term 'net worth' represent in personal finance?
Total assets minus liabilities
ExplanationNet worth is the difference between an individual's total assets (what they own) and liabilities (what they owe).
#7
What does the 'Rule of 72' help estimate?
Growth of an investment
ExplanationThe Rule of 72 is a formula used to estimate the time required for an investment to double in value based on a fixed annual rate of return.
#8
What is the purpose of a 'budget' in personal finance?
To plan and track income and expenses
ExplanationA budget helps individuals manage their finances by outlining expected income, expenses, and saving goals.
#9
What is the concept of 'compounding interest'?
Interest calculated on both the principal amount and previously earned interest
ExplanationCompounding interest involves earning interest on the initial amount deposited as well as on the interest accumulated over time.
#10
What is the primary purpose of diversification in investment portfolios?
To minimize risk
ExplanationDiversification involves spreading investments across different assets to reduce the impact of poor-performing assets on the overall portfolio.
#11
What is the debt-to-income ratio used for in personal finance?
To measure an individual's ability to repay debt
ExplanationThe debt-to-income ratio assesses the proportion of income used to repay debts, helping lenders evaluate a person's borrowing capacity.
#12
What does the term 'asset allocation' refer to in investing?
The process of dividing investments among different asset classes
ExplanationAsset allocation involves distributing investments across various asset classes (stocks, bonds, etc.) to achieve a balance between risk and return.
#13
Which of the following is NOT typically considered a factor affecting credit score?
Level of education
ExplanationWhile education is important, it doesn't directly impact credit scores; factors include payment history, credit utilization, etc.
#14
Which of the following is NOT a recommended step in creating a financial plan?
Ignoring emergency savings
ExplanationEmergency savings are crucial; ignoring them can leave individuals vulnerable to unexpected expenses.
#15
Which of the following is a characteristic of a Roth IRA?
Contributions are not taxed, and qualified withdrawals are tax-free
ExplanationRoth IRA contributions are made with after-tax dollars, and qualified withdrawals, including earnings, are tax-free.
#16
Which of the following is a characteristic of a 401(k) retirement account?
Contributions are tax-deductible, but withdrawals are taxed
ExplanationContributions to a traditional 401(k) are made with pre-tax dollars, but withdrawals are taxed as ordinary income.
#17
Which of the following factors affects an individual's credit score the most?
Credit utilization ratio
ExplanationThe credit utilization ratio, the ratio of credit card balances to credit limits, has a significant impact on credit scores.