Test your knowledge of basic financial and investing topics with these 20 questions.
Test your knowledge of basic financial and investing topics with these 20 questions.
To put together this quiz, the author has drawn on her experience as the primary fact checker for Medical Economics' money management articles.
Are you as likely to tune out your financial planner as you are the latest Britney Spears single? Do you turn off the television when the business news comes on?
Maybe you're not as up to speed on financial topics as you should be. Don't panic just yet, though. If you've been reading past the personal finance headlines in the pages of Medical Economics, you may understand more about money matters than you realize. To find out how much you really do know, and where you need to bone up, take this quiz, then tally your score with the key.
1. A stock's price-earnings ratio is:
A. Earnings per share divided by price per share
B. Price per share divided by earnings per share
C. Measured on a scale of 1 to 100
D. In this market, as meaningless as a dimpled chad
2. To guard against loss of principal, your best bet is a:
A. Money-market fund
B. 1969 Corvette in excellent condition
C. Treasury bill
D. Short-term bond
3. A smart way to give stock to a charity is to:
A. Sell the shares and donate the cash
B. Donate shares that have lost value since you bought them
C. Donate duds that will probably tank the next time the market swoons
D. Donate shares you've held long term that have gained in value
4. The IRS says ordinary income includes:
A. Profit on the sale of your home
B. Only income earned from employment
C. Profit on mutual fund shares
D. Stock dividends
5. Gross domestic product is:
A. Exclusive of what the dot-commers have lost this year
B. The prime measure of economic output in the US
C. Imports minus exports
D. The total income of all individuals in the US
6. A mutual fund's turnover ratio is:
A. The average tenure of its managers
B. Directly proportionate to its load
C. The percentage of assets sold during the year
D. A red flag that it's time to dump your shares
7. You're likely to get the highest rate of return from:
A. Municipal bonds
B. High-yield bonds
C. Short-term bonds
D. Treasury bonds
8. A generation-skipping trust:
A. Leaves all your assets to your children and none to your grandchildren
B. Forewarns the IRS that you plan to shelter assets
C. Leaves half your assets to your grandchildren and half to your children
D. Can ensure that your assets will go to your grandchildren, free of estate tax
9. The pre-tax amount you can contribute per year to a 401(k) is:
B. $10,500 for 2001, adjusted annually for inflation
C. Doubled if you're married or in a relationship that meets IRS guidelines for "seriousness"
D. Capped at 10 percent of compensation
10. First-year expensing:
A. Increases the taxes you'll pay when you purchase expensive equipment
B. Applies only to supplies with a life of one year or less
C. Allows you to deduct up to $20,000 of the cost of your equipment in the year of purchase
D. Lets you deduct all child-rearing expenses in your baby's first year
11. Investing in OTC Bulletin Board stocks:
A. Is a sure way to cure narcolepsy
B. Is a virtually risk-free way to invest in mid-cap stocks
C. Puts your money in stocks too small to be listed on the Nasdaq
D. Diversifies you into over-the-counter pharmaceuticals
12. The worst time to buy shares in a mutual fund is:
A. Immediately after a capital gains distribution
B. At the beginning of the month
C. At the end of the year
D. After Alan Greenspan speaks
13. Dollar-cost averaging is:
A. The average amount of cash you spend daily
B. The current exchange rate of the dollar vs the yen
C. The method the IRS prefers you to use in determining the basis of stock shares
D. A series of regular, periodic investments designed to lower risk
14. In a community property state:
A. Each spouse owns all of the other's assets
B. Each spouse owns half of the couple's assets
C. Each spouse owns assets separately
D. Half of a couple's assets are owned separately, half jointly
15. A self-employed physician can deduct:
A. 50 percent of his health insurance premiums in 2001
B. 100 percent if his practice employs his wife
C. Nothing for health insurancephysicians can't take the deduction
D. Only 70 percent, even if his practice employs his wife
16. A mortgage lender can force you to buy flood insurance:
A. From any carrier it chooses, if you live in a Special Flood Hazard Area
B. If you've got a washing machine in your basement
C. Even if you're not in a flood zone; however you do have a choice of insurer
D. If you live within 50 miles of the Mississippi River
17. REIT stands for:
A. Real Estate Investment Trust
B. Real Equity Income Trigger
C. Return on Equity Investment Target
D. Real Estate Investment Tax
18. Pension law allows you to delay taking mandatory distributions until:
A. You really need the money
B. The year after you retire, if you're an owner of your practice
C. The year after you retire, if you're not a practice owner
D. Seven years after you retire or nine years after you turn 65, whichever comes first
19. When you buy stock using a limit order:
A. Your broker purchases the stock at the going market rate
B. Your broker refunds a portion of the sales price to the seller
C. Your broker buys it at or below the price you set
D. Your gains are limited, but your losses aren't
20. Income replacement coverage is better known as:
A. Disability insurance
B. Your retirement plan
C. Own-occupation coverage
D. Social Security
1-B. The P-E ratio is a good comparative tool. If a company's ratio is significantly higher than that of the overall market or those of other companies in the same industry, it's a sign that the price is too high. Analysts use different measures to evaluate what's "high," but a good benchmark is the P-E of the Standard & Poor's 500 Stock Index, currently 25.
2-C. T-bills have the full faith and credit of the US government behind them. You can't get much safer than that. The US government would have to default on its loans for you to lose a dollar of your investment. The '69 Corvette could do pretty well, too.
3-D. When you donate shares held long term, you don't pay tax on any gain, and you get to deduct the shares' current market value on your tax return. The charity can then do what it wishes with the shares, tax-free.
4-D. Profit on the sale of your home and your mutual fund shares is capital gain. Stock dividends are taxed as ordinary income.
5-B. Gross domestic product, a key tool used to evaluate the economy's growth, represents the market value of goods and services produced in the US.
6-C. A fund's turnover ratio indicates its style and volatility. A high ratio can warn investors of a possible tax hit, as well: When a fund sells winning stocks, shareholders pay tax on the gains. However, if a fund also sells shares that have dropped in value, the losses will offset some capital gains and shrink the tax bite.
7-B. Theoretically, high-yield bonds are named appropriately enoughthey're likely to reward investors with a higher yield than municipals and Treasuries. But sometimes they live up to their nickname, junk bonds, because they also carry a higher risk of default.
8-D. You'll be able to shelter up to $1 million in a generation-skipping trust if you live past 2005. The trust can retain some or all of the investment income or distribute it to your children or grandchildren. When your kids die, your grandchildren will inherit whatever remains in the trust fund, free of estate tax, even if the earnings have pushed the total value over $1 million.
9-B. The limit increased to $10,500 for 2000. It remains at that level for 2001, because inflation wasn't high enough to merit another adjustment.
10-C. You can deduct up to $20,000 of the cost of equipment you purchased and placed in service this year. Any remaining cost can be depreciated for this and coming years.
11-C. Over-the-counter stocks that don't meet the minimum net worth and other requirements for the Nasdaq listing system trade on the OTC Bulletin Board. These stocks tend to be riskier because of their size, so if you answered A, add half a point to your score.
12-C. Funds typically distribute capital gains and dividends to shareholders at the end of the year. If you invest right beforehand, in effect you'll pay tax on the return of your recently invested cash.
13-D. Dollar-cost averaging lowers the risk of impulsive spending on expensive high-fliers, by forcing you to buy more shares when the price is low and fewer when the price is high.
14-B. However, most community property states do allow married couples to designate any of their assets as individually owned, as long as both spouses agree. Such assets are titled as "sole and separate property," in the individual spouse's name.
15-B. Instead of the practice's providing health insurance for the physician directly, his wife, as an employee of the practice, can add him to the policy provided for her. That way, the entire amount is deductible as business expense on Schedule C.
16-C. Federally regulated lenders must require borrowers to have such coverage for properties in designated Special Flood Hazard Areas. But even if you don't live in a SFHA, your lender could force you to purchase flood insurance. You needn't get the insurance the lender wants to sell you, thoughyou're free to buy a policy from an agent that deals with the Federal Insurance Administration, or from a private insurer.
17-A. Many real estate investment trusts are of the equity type: They own real estate and make their money from rents, leases, and sales of buildings. The other basic types are mortgage REITs, which lend money to developers and pass the interest income to shareholders; and hybrid REITS, which combine the equity and mortgage approaches.
18-C. If you don't own more than 5 percent of the practice, you can delay the normal date for beginning withdrawalsusually April 1 of the year after you turn 70 1/2until April 1 of the year after you retire.
19-C. A limit order fixes the amount at which you're willing to buy or sell, preventing you from paying a temporarily inflated price or receiving too little during a price free fall.
20-A. Disability insurance is coming to be known as "income replacement" or "income protection" coverage. But if you're still able to earn half your salary after a disability, the insurer may cover only 60 percent of the other half.
20: Great job! Are you sure you're not a financial planner in your spare time?
17-19: Very good. You're well on your way to understanding the contents of Alan Greenspan's briefcase.
14-16: Nice. You've got most of the basics down, but don't start writing your own estate plan just yet.
10-13: Okay, but you'd better brush up on your weak topics.
9 or fewer: You flunked. Hit the books now.
Vicki Brentnall. Smart about money matters? Take this quiz. Medical Economics 2001;11:71.