Investment Fundamentals Test 1

Question 1

The majority of _________ ETFs "reset" everyday, which means they are made to accomplish their investment goal every day.

Accepted Answer

Leveraged

Answer

Leveraged ETFs (Exchange Traded Funds) are designed to amplify the returns of an underlying index, often by a multiple (e.g., 2x or 3x). These funds typically 'reset' their leverage daily, meaning they aim to achieve their stated investment goal over a single trading day. Due to this daily reset, their long-term performance can significantly diverge from the stated multiple of the underlying index.

Question 2

If you purchase stock in a corporation...

Accepted Answer

You have equity in the business.

Answer

When you purchase stock in a corporation, you become a part-owner of that company. This ownership stake is referred to as equity. As a shareholder, you have certain rights, such as voting on company matters and potentially receiving dividends, but you are not lending money to the company or directly responsible for its debts.

Question 3

If you purchase a corporate bond...

Accepted Answer

You gave the business a loan of money.

Answer

Purchasing a corporate bond means you are lending money to the corporation. In return for this loan, the company promises to pay you regular interest payments over a specified period and repay the principal amount at maturity. Bonds are debt instruments, making you a creditor rather than an owner of the company.

Question 4

What kind of bond is the most secure?

Accepted Answer

US. Treasury bond

Answer

U.S. Treasury bonds are considered the most secure type of bond because they are backed by the full faith and credit of the United States government. This government guarantee makes them virtually free of default risk, meaning there is an extremely low probability that the government will fail to make its interest or principal payments. This makes them a benchmark for low-risk investments.

Question 5

Which of the following best describes what a "junk bond" is?

Accepted Answer

A bond that rating agencies have deemed to be "below investment-grade"

Answer

A 'junk bond,' also known as a high-yield bond, is a bond that has been rated by credit rating agencies as 'below investment-grade.' This low rating indicates a higher risk of default compared to investment-grade bonds. To compensate investors for this increased risk, junk bonds typically offer significantly higher interest rates.

Investment Practice Test

Investment Practice Test

Investment Fundamentals Test 1