30 June 2011

How much do you know?

Financial knowledge, sometimes known as financial literacy, is cropping up in the news again. The truly good folks over at the FINRA Investor Education Foundation have been doing some excellent survey work on the American public, and one of the things they have found is that we are not very financially knowledgeable. Take this five question quiz for yourself and tune in later for the explanations behind the correct answers.

1.      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
d.      Do not know

2.      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 as today
c.       Less than today
d.      Do not know

3.      If interest rates rise, what will typically happen to bond prices?
a.       They will rise
b.      They will fall
c.       They will stay the same
d.      There is no relationship between bond prices and interest rates
e.       Do not know

4.      Is this statement true or false: A 15-year mortgage typically requires higher monthly payments than a 30-year mortgage, but the total interest paid over the life of the loan will be less.
a.       True
b.      False
c.       Do not know

5.      Is this statement true or false: Buying a single company’s stock usually provides a safer return than a stock mutual fund.
a.       True
b.      False
c.       Do not know

Correct answers: a,c,b,a,b

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