NAB Investment Basics 2 — Questions and Answers
Question 1: What does 'compound interest' mean in the context of investing?
- Interest calculated only on the principal amount
- Interest earned on both the principal and previously accumulated interest (Correct answer)
- A fixed interest rate that never changes
- Interest paid out monthly rather than reinvested
Correct answer: Interest earned on both the principal and previously accumulated interest
Compound interest means you earn returns on your original investment plus on the interest already earned, accelerating growth over time.
Question 2: Which investment type typically offers the highest potential return over the long term but also carries the most risk?
- Government bonds
- Term deposits
- Equities (stocks) (Correct answer)
- Cash savings accounts
Correct answer: Equities (stocks)
Equities historically offer the highest long-term returns but come with greater volatility and risk of capital loss.
Question 3: What is a 'term deposit' in the context of NAB's investment products?
- A savings account with unlimited withdrawals
- A fixed-rate investment held for a set period with penalties for early withdrawal (Correct answer)
- A managed fund that invests in government bonds
- A type of personal loan used to fund investments
Correct answer: A fixed-rate investment held for a set period with penalties for early withdrawal
A term deposit locks your money for a fixed period at a fixed interest rate, typically offering higher returns than an everyday savings account.
Question 4: What does 'liquidity' mean when referring to an investment?
- The investment's ability to generate passive income
- How quickly and easily an investment can be converted to cash without significant loss (Correct answer)
- The amount of debt associated with an investment
- The tax efficiency of an investment vehicle
Correct answer: How quickly and easily an investment can be converted to cash without significant loss
Liquidity describes how easily an asset can be sold or converted to cash — a savings account is highly liquid, while real estate is not.
Question 5: If an investor holds a 'diversified portfolio,' what does this mean?
- All investments are in a single high-performing asset class
- Investments are spread across multiple asset classes to reduce risk (Correct answer)
- The portfolio is managed by multiple fund managers simultaneously
- All assets are denominated in foreign currencies
Correct answer: Investments are spread across multiple asset classes to reduce risk
Diversification involves spreading investments across different asset classes so that poor performance in one area doesn't devastate the entire portfolio.
Question 6: What is a 'managed fund'?
- A bank account managed by a financial adviser on your behalf
- A pooled investment vehicle where many investors' funds are combined and professionally managed (Correct answer)
- A government-guaranteed savings product offered by major banks
- A self-directed investment account with no management fees
Correct answer: A pooled investment vehicle where many investors' funds are combined and professionally managed
A managed fund pools money from multiple investors and a professional fund manager invests it across a range of assets.
Question 7: What is an 'exchange-traded fund' (ETF)?
- A fund that can only be purchased directly from a bank
- A pooled investment that tracks an index and trades on a stock exchange like a share (Correct answer)
- A government bond traded between central banks
- A foreign currency investment product
Correct answer: A pooled investment that tracks an index and trades on a stock exchange like a share
An ETF is a basket of securities that tracks an index and is bought and sold on a stock exchange, combining diversification with share-like tradability.
NAB Investment Basics 2
What does 'compound interest' mean in the context of investing?