"Answers to Lowell Sun Investment Quiz"

1. If interest rates declined, the price of a bond fund would generally:
a. Increase in value
b. Decrease in value
c. Stay about the same

 

Correct Answer: A. Increase in value
When interest rates go down the value of bonds funds tend to go up. And when interest rates go down, bond values tend to generally go up. That’s because bonds have an inverse relationship with interest rates. For example, if you own a $10,000 bond paying 3% and interest rates go up to 4%, your 3% bond is less attractive on the open market to investors who could buy a new $10,000 bond paying 4%. If you wanted to sell your bond, you would have to sell it (at a discount) for less than $10,000. Conversely, if you own a bond that is paying 3% and interest rates go down to 2%, your 3% bond is more attractive to potential bond investors. You could now sell it (at a premium) for more than $10,000.

2. According to the IRS when does an individual need to begin taking required minimum distributions from a ROTH IRA?
a. Never
b. at age 59 1/2
c. at age 651/2
d. at age 701/2

 

Correct Answer: A. Never
Unlike traditional IRA’s with RMD’s at age 701/2, there are no age distribution requirements with a Roth IRA.

3. Duration is a measure of a bond fund's sensitivity to _______.
a. Inflation
b. Interest rates changes
c. Stock market volatility
d. None of the above

 

Correct Answer: B. Interest Rate Changes
A bond fund with a duration of 5 years, means that a, 1% increase in interest rates would cause the fund to lose about 5% of its value. Conversely, a 1% decrease in interest rates would increase the funds value by 5%

4. A mutual funds expense ratio is a number (expressed in percentage terms) that represents all of the costs associated with owning a mutual fund.
a. True
b. False

 

Correct Answer: B False
The expense ratio does not include brokerage commissions, trading expenses, as well as any sales charges or "load fees” you may pay when buying or selling a fund.

5. Under which of the following conditions would an individual not have to pay the IRS a 10% penalty tax for withdrawing contributions from their Roth IRA before age 591/2?
a. To pay for their child’s college education
b. If they became disabled
c. To purchase a new car
d. Both A and B
e. All of the above

 

Correct Answer: E. All of the above
Contributions to a Roth IRA are made with after tax dollars. As a result, you can always withdraw the contributions at any time, and for any reason, tax and penalty free.

6. A $10,000 investment made in a mutual fund achieves a gross annual return of 8%. If the fund has a front-end load of 5 % and expense ratio of 1 percent, its net annual return would be______.
a. 1.5 percent
b. 4.0 percent
c. 5.5 percent
d. 7.0 percent

 

Correct Answer: A. 1.5%
$10,000 reduced by a 5% load ($500) paid to the broker, leaves $9,500 to be invested. An eight percent return on $9,500 is worth $10,260, minus an expense ratio of 1% (-$102.60) Is now worth, $10,157. The net annual return is 1.5 percent.

7. If inflation averaged 3.5 percent, you would need __________of savings in twenty years, to maintain the same level of purchasing power that $50,000 can buy today.
a. $70,000
b. $80,000
c. $100,000
d. $120,000

 

Correct Answer: C. $100,000

 

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