Quiz: Personal Finance 201

By Riverstones Vista Capital Staff

PUBLISHED January 06
|
5 MINUTE READ

Whatever your financial goals are, the more you know about how to make the most of your money, the more confidence you will have in your decisions.

So, how savvy are you about strategies and tactics? Test your knowledge by taking our 10-question Personal Finance 201 quiz.

1Building a CD ladder is a simple strategy to earn higher interest on your savings, while retaining access to some of your money at any point in time. Which of the following statements about certificate of deposit ladders are true?
- A. CD ladders divide a pot of money among multiple CDs with staggered maturity dates.
- B. CD ladders can reduce interest-rate risk.
- C. CD ladders may be good tools for savers who have longer-term goals or who are looking for less risky investments.
- D. All of the above.
Answer D.
All of these are potential advantages. The beauty of a CD ladder is that it can balance the need for higher yields with the need for regular access to your money. And when it comes to generating income, CD ladders are a less risky investment than pidend-paying stocks or interest-bearing bonds. To refresh your knowledge, read CD Ladders.
2Stocks and bonds tend to respond differently to changes in the market. Which of these factors doesn’t affect bond prices?
- A. Interest rates
- B. Inflation
- C. Corporate earnings and profits
- D. Credit ratings
Answer C.
Corporate performance can cause stock prices to rise or fall—depending on whether the news is good or bad—but generally don’t impact bond prices. However, when interest rates and inflation rise, bond prices typically fall (and vice versa). And often, if a bond issuer’s credit rating goes up, the price of its bonds will rise. A rating decline will drive bond prices lower. To refresh your knowledge, read Stocks and Bonds.
3True or false? Investors can buy or sell shares in an exchange-traded fund (ETF) on a stock exchange.
- A. True
- B. False
Answer A.
Mutual funds and ETFs are both popular investments that bundle many different assets into a single fund. But how investors buy or sell shares in each type is very different. When you buy units or shares of a mutual fund, you’re pooling your money along with other investors. As more people invest, the fund issues new units or shares. The share price is figured from the fund’s net asset value (assets minus liabilities) at the time of purchase, and shares are only bought and sold after the trading day has ended. ETFs trade like stocks on exchanges, such as the NYSE or Nasdaq, and their market price changes throughout the day. To refresh your knowledge, read Mutual Funds and ETFs.
4A target date fund gradually adjusts toward more conservative assets as it approaches a specific date—usually the year of your expected retirement. What is this automatic shift in asset allocation called?
- A. Glide path
- B. “Through” fund
- C. Set it and forget it
Answer A.
A target date fund’s shift in asset mix over time is known as its glide path, and every fund follows its own trajectory. This is broadly based on whether it’s a “to” fund (which stops adjusting asset allocations once it hits the target year) or a “through” fund (which takes you “through” the target date, continuing to shift the asset mix over a preset number of years). To refresh your knowledge, read Target Date Funds.
5Both traditional and Roth accounts can be effective retirement savings tools, but what’s a key difference between these types of plans?
- A. There are no income limits on Roths.
- B. You don’t have to start withdrawing money from a traditional IRA at age 70½.
- C. They differ on how and when you get a tax break.
Answer C.
Taxes are a main difference between the two. With a traditional type of account, you could be eligible for an upfront tax deduction on your contributions, as they’re made on a pre-tax basis. Once you’re in retirement, you’ll pay income tax on the money you withdraw. With Roths, you fund the accounts with after-tax money. This means you don’t receive a tax deduction on the contributions you make; once you begin taking withdrawals, you pay no taxes. To refresh your knowledge, read Traditional vs. Roth IRAs.
6If you work for yourself or own a small business with a few employees, you have an array of options for setting aside tax-advantaged savings for retirement. Which of these plans specifically cater to individuals without access to an employer-sponsored retirement plan?
- A. Traditional and Roth IRAs
- B. Simplified Employee Pension (SEP) IRAs
- C. Savings Incentive Match Plans for Employees (SIMPLE) IRAs
- D. Solo 401(k)s
- E. All of the above
Answer E.
Each of these plans is available to self-employed people. Whether you work alone or employ others, the best plan—or mix of plans—for your situation generally depends on three factors:

•   Whether you have (or expect to have) employees other than yourself.
•   If you want those employees to be able to contribute, too.
•   Whether your top priority is to maximize contributions or simplify administration.

To refresh your knowledge, read Retirement Plans.
7As with most things in life, there are tradeoffs between leasing vs. buying a new car. Which statement about auto leasing is false?
- A. New-car leases generally cost less per month than new-car loans.
- B. Leases often come with very few restrictions on use of the vehicle.
- C. Some leases give you the option to purchase the car at the end of the lease term.
Answer B.
Leases do carry some restrictions. These can include annual mileage limits and penalties for excess mileage, excessive wear and tear, and ending the lease early. To refresh your knowledge, read Auto Leasing.
8Both tax credits and tax deductions can help trim your income tax burden. But which of these tax breaks is more valuable than the other?
- A. Tax credits
- B. Tax deductions
Answer A.
Tax credits are always more valuable than deductions because they cut your bottom-line tax bill dollar for dollar. A $500 tax credit means you owe $500 less in taxes.

In comparison, tax deductions reduce your taxable income, which simply lowers the amount used to calculate the tax owed. Thus, a $500 tax deduction lowers your taxable income by $500. If your effective tax rate is 20%, then you would cut your tax bill by only $100. To refresh your knowledge, read Tax Credits vs Tax Deductions.
9Money in 529 accounts grows tax-deferred and can be withdrawn tax-free, as long as funds are used for qualified expenses. True or false? Funds from a 529 plan can be used to pay for more than just college tuition and fees.
- A. True
- B. False
Answer A.
It’s true. Qualified education expenses include the cost of tuition, fees, room and board (if a student is enrolled at least half-time), books, supplies, and computer equipment (including any software or printer that’s required as part of the course of study).

In addition, thanks to an expansion of 529 tax-law rules that began last year, 529 plan owners in most states can also use the funds to pay up to $10,000 per student per year for tuition at an elementary or secondary private or religious school (kindergarten through grade 12). To refresh your knowledge, read 529 Plans.
10Fixed-income annuities often come with fees, which may not always be quantified. What’s generally the best way to assess the impact of these charges?
- A. Read the fine print in the marketing materials.
- B. Ask for the fee booklet.
- C. Compare different insurers’ payout amounts for the type of annuity you're considering.
Answer C.
The full impact that unseen fees have on a fixed-income annuity becomes apparent if you ask an insurer for a number of different contract options with your payouts. In general, the lower the payout amount, the more you’re likely paying in fees. To refresh your knowledge, read Fixed-Income Annuities.

PERSONAL FINANCE 201