What investor doesn't like to test his or her knowledge? Here's a chance to do that with an online test put together by the U.S. Securities and Exchange Commission.
Called the "Investing Quiz," this is a monthly 10-question test found at Investor.gov, a website of the SEC (tinyurl.com/3adaud3f).
Some questions are harder to answer than others, but the best part is that after you take the test (you will see one question at a time until you have answered all 10), you'll receive a score, and -- more important -- all of the answers are explained. Let me offer three examples involving interest from this month's (February's) quiz, which also has questions on diversification and crypto assets:
"Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow? A) More than $102? B) Exactly $102 C) Less than $102"
The answer?
"According to the compound interest calculator on Investor.gov, you will have $110.41 in 5 years if you earn 2% per year. At the end of the first year, you would already have $102. In the following years, both the principal and any accumulated earned interest would continue to grow over time."
Here is another question, which is of added importance given today's economic numbers: "Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, how much would you be able to buy with the money in this account? A) More than today. B) Exactly the same. C) Less than today."
The answer: "If the rate of inflation is higher than [the] interest rate you earn on your money, you won't have the same buying power. That's because inflation makes the cost of goods and services go up over time."
And finally, a question about loans and interest rates: "Suppose you owe $1,000 on a loan and the interest rate you are charged is 20% per year compounded annually. If you didn't pay anything off, at this interest rate, how many years would it take for the amount you owe to double? A) Less than 2 years. B) At least 2 years but less than 5 years. C) At least 5 years but less than 10 years. D) At least 10 years."
The answer provides more insight into the power of compound interest: "Compound interest can work for you when you save and invest, but it can also work against you if you have taken out a loan! The Rule of 72 can tell you approximately how long it will take for the principal of a loan to double in value (assuming no payments toward the loan are made). Simply divide the number 72 by the interest rate. The amount you owe on a loan with an interest rate of 20% will double about every 3.6 years (72 divided by 20 equals 3.6)."
Each of the 10 questions is worth one point. You'll see your score and the explanations for the correct answers once you have answered the questions. You'll also have the option to take the quiz again.
At the bottom of the answers, you will find a link to the previous month's quiz. Past monthly topics include bonds, diversification and compound interest (November 2023) and investor resilience, crypto assets and sustainable finance (October 2023).
The quiz is not only good for investors who are testing or refreshing their knowledge, it can also help young adults learn about key investing concepts. And, if they want to further explore the concepts of investing, they can click on the "Introduction to Investing" link on the Investor.gov website (tinyurl.com/3fkbnker).
DISTRIBUTED BY ANDREWS MCMEEL SYNDICATION