Test Questions Answered


Test Questions Answered

In my last article I reiterated the importance of having a basic understanding of the financial world and I posed 22 multiple-choice questions so you could test yourself on your general financial knowledge. In case you missed the article I will repeat the questions here but do cover the second part which contains the answers and where appropriate, some explanations. You can also see how you rate in terms of correct responses.

Q1 What is the S&P 500? a) An annual motor car race held in indiannapolis in the US. b) An index of the top 500 companies on the New York stock exchanges. c) A list of the top 500 savings and pension companies in the US.

Q2 If your money in the bank is earning 2% interest and inflation is running at 3% per annum will you be able to buy more goods with your money after 10 years or less than today? a) More. b) Less. c) The same.

Q3 Is it usually cheaper to borrow money through your credit card or via a bank loan? a) Cheaper. b) More expensive. c) The same.

Q4 Higher interest rates on deposits generally imply a stronger currency. a) True b) False c) Makes nodifference.

Q5 Do bond holders or shareholders have first call on the proceeds in the event of the liquidation of a company? a) Bond holders. b) Shareholders. c) Neither, since creditors have first call.

Q6 If you invested in government bonds, which country is likely to pay you the highest rate of interest? a) Japan b) Indonesia c) The United States.

Q7 Are you guaranteed to receive interest and the return of your capital if you invest in government bonds of any country? a) Yes b) No.

Q8 If you buy a government bond that on issue has a fixed rate of interest, what happens to the value of the bond during its term if prevailing interest rates in the market rise? a) The value rises also b) The value falls c) The value stays the same.

Q9 If a sovereign government has difficulty repaying capital and interest on bonds can it simply print money to meet its obligations? a) Yes b) No c) Possibly.

Q10 If you place your assets into a Trust are you still the legal owner? a) Yes b) No, the Trust is the legal owner c) You have joint legal ownership with the Trust.

Q11 If you have a sum of money and hope to get the highest return over 12 months where should you invest it? a) In one single asset class b) In a fixed deposit c) In a wide range of assets.

Q12 You, as a foreigner, wish to put the bulk of your savings aside for retirement in 15 years’ time. Where should you invest it? a) In land in Bali b) In a diverse range of asset classes. c) In gold.

Q12A FATCA stands for a) Fight Against Terrorism and Criminal Activities b) Foreign Account Tax Compliance Act c) Funds Applied To Current Accounts.

Q13 FATCA will affect: a) US nationals only b) US and UK nationals only c) Nationals of over 50 countries.

Q14 Which of the following groups of countries are all considered emerging markets? a) Brazil, Russia, China b) US, Australia, Indonesia c) Thailand, Italy, Singapore.

Q15 The acronym ‘BRIC’ stands for a) Brazil, Russia, Iceland, Canada b) Brazil, Russia, India, China c) Britain, Russia, Israel, China.

Q16 High returns imply high risk a) invariably b) Not true; some of the highest returns are without risk c) Only when investing in stock markets.

Q16A The best time to take out life insurance is when: a) You are young and healthy but can least afford it b) Later on when you have built up your savings c) After a serious illness.

Q17 Hedge funds are: a) A very safe alternative to bank deposits b) A useful addition to a large, balanced portfolio c) Highly risky and to be avoided at all costs.

Q18 Private Equity investments are suitable for: a) High Net Worth investors who can take a very long term view b) Widows and orphans c) The average investor who wants a diversified portfolio.

Q19 A ‘bear’ market is one where: a) Prices appear to be in a long term decline b) Prices appear to be in a long term climb c) Prices have barely moved for a long period.

Q20 The price of gold today in USD (as of December 2014 compared to 10 years ago) is: a) Close to three times higher b) Around 50% lower c) About the same (give or take 10%).

And now the answers!

Q1 b) Q2 b) Q3 b) Interest on money borrowed on a credit card can be outrageously high. Q4 b) it’s the weaker currencies that have to provide incentives to attract depositors. Q5 c) Shareholders come last. Q6 b) Same principle that applies to deposits. Q7 b) While the capital and interest should be guaranteed, sovereign governments have still been known to default. Q8 b) The value falls because the original fixed rate of interest is now less attractive. Q9 c) Most governments can do so but not in the Eurozone where countries share the same currency and no single country can therefore print its own money. Q10 b) The Trust is the legal owner but you may be the beneficial owner. Q11 a) Bit of a catch question since the single asset class with the highest return will vary each year. So while you may hope to get the highest return and may succeed, you may also lose money. The safest strategy (but not the right answer) would be b) since a 12 month term is very short in investment terms. It won’t provide the highest return but neither would it risk losing money.

Q12 b) Many will argue that land in Bali would be the best investment and historically it would be a strong argument. But as a foreigner there are serious risks and while it might be appropriate for surplus disposable savings it would be highly risky if it represented the bulk of your savings. Gold could pay off but is too unpredictable. Diversification is the safest strategy for retirement. Q12A b) Q13 c) While US nationals are deeply affected there are now over 50 countries that have signed up to an exchange of tax information. Q14 a) Q15 b) Q16 a) No investment is entirely without risk but the relationship between risk and return is a fact of life in the investment world. Q16A a) Once you have a history of medical problems the insurance companies will not want to know you. Q17 b) Q18 a) Q19 a) Bears ‘drag you down’ whilst bulls ‘toss you up’. Q20 a) And that is despite the fall in the price of gold in 2014.

So how many questions out of 22 did you get right? (One bonus point if you noticed last month that I can’t count and presented 22 questions instead of 20)

20 or higher: Excellent! (Send me your cv!)

16 to 19: You have a pretty good grasp of the financial world.

10 to 15: If you can improve your knowledge you will find it pays dividends when it comes to finance.

3 to 9: Don’t make any big investment decisions without seeking advice.

Less than 3: Seek help when you’ve finished surfing or emerged from the hills!
I hope this not-too-serious quiz has inspired an increased awareness of the challenges and pitfalls in the world of finance. Ignorance may be bliss but knowledge is power!

Colin Bloodworth of PPI Indonesia has spent over 20 years in Indonesia. He is based in Jakarta but visits Bali frequently. If you have any questions on this article or related topics you are welcome to contact him at colin.bloodworth@ppi-advisory.com or +62 21 2598 5087

You can read all past articles of Money Matters at
www.BaliAdvertiser.biz
Copyright © 2015 Colin Bloodworth