What is a Ponzi scheme?

What is a Ponzi scheme?

• A. A government bond
• B. Fraudulent investment scheme that uses cash from newer investors to pay off older ones
• C. A legitimate mutual fund
• D. A savings account

Answer: (B)

A Ponzi scheme is a fraudulent investment setup that pays returns to earlier investors using the money coming in from newer investors, not from any genuine profits earned by an underlying business. Because there isn’t real investment growth backing the payouts, the scheme relies on a constant flow of new funds to keep it going. When new money slows or withdrawals spike, the scheme falls apart and most participants lose their money. This is distinct from a government bond, which is a legitimate loan to the government with fixed interest payments; from a legitimate mutual fund, which pools investors’ money to buy real investments and earns returns from those assets; and from a savings account, which safely holds your money and pays interest. The defining trait described—funds paid to earlier investors from new investors’ cash—best captures what a Ponzi scheme is.

A Ponzi scheme is a fraudulent investment setup that pays returns to earlier investors using the money coming in from newer investors, not from any genuine profits earned by an underlying business. Because there isn’t real investment growth backing the payouts, the scheme relies on a constant flow of new funds to keep it going. When new money slows or withdrawals spike, the scheme falls apart and most participants lose their money. This is distinct from a government bond, which is a legitimate loan to the government with fixed interest payments; from a legitimate mutual fund, which pools investors’ money to buy real investments and earns returns from those assets; and from a savings account, which safely holds your money and pays interest. The defining trait described—funds paid to earlier investors from new investors’ cash—best captures what a Ponzi scheme is.