# Test Your Money Smarts with

## 7 Basic Questions About Finance

### QUESTION 1: Interest

#### Suppose you have $100 in a savings account earning 2% interest per year. After five years, how much would you have?

- More than $102
- Exactly $102
- Less than $102
- Don't know

### ANSWER 1: **A**

#### It's **more than $102** due to compounding interest.^{3}

####
The Math: A savings account with $100 and a 2% annual interest rate would earn $2 the first year (an ending balance of $102). Year 2, the $102 would earn $2.04 (an ending balance of $104.04). By year 5, the savings
account would grow to $110.41.^{3}

How many folks answered:^{1}

Correct: 43%

Incorrect: 11%

Don't know: 45%

### QUESTION 2: Inflation

#### Imagine that the interest rate on your savings account is 1% per year and inflation is 2% per year. After one year, would the money in the account buy more than it does today, exactly the same, or less than today?

- More
- Same
- Less
- Don't know

### ANSWER 2: **C**

#### You have **less** due to inflation, the rate at which the prices rise.^{3} If the inflation rate is greater than the savings interest rate, your buying power will not keep up with inflation.

How many folks answered:^{1}

Correct: 55%

Incorrect: 22%

Don't know: 21%

### QUESTION 3: Bonds

#### If interest rates rise, what will typically happen to bond prices? Rise, fall, stay the same, or is there no relationship?

- Rise
- Fall
- Stay the same
- No relationship
- Don't know

### ANSWER 3: **B**

####
When interest rates rise, bond prices **fall** (and vice versa). This is because rising interest rates bring newer bonds to market. The newer bonds pay higher interest yields than older bonds,
making those older bonds worth less.^{3}

How many folks answered:^{1}

Correct: 26%

Incorrect: 37%

Don't know: 36%

### QUESTION 4: Mortgages

#### True or false: A 15-year mortgage typically requires higher monthly payments than a 30-year mortgage but the total interest over the life of the loan will be less.

- True
- False
- Don't know

### ANSWER 4: **A**

####
Assuming the same interest rate for both, **you pay less in interest** for a 15-year loan because you repay the principal faster.^{3} That's also why the
**monthly payment for a 15-year loan is higher.**

#### The Math: With a 30-year mortgage at 6% on a $150,000 home, you pay $899/month in principal and interest charges. Over 30 years, that's $173,757 in interest alone. A 15-year mortgage will cost you nearly $100,000 less — $1,266/month but only $77,841 in total interest.

How many folks answered:^{1}

Correct: 73%

Incorrect: 9%

Don't know: 17%

### QUESTION 5: Risk

#### True or false: Buying a single company's stock usually provides a safer return than a stock mutual fund.

- True
- False
- Don't know

### ANSWER 5: **B**

####
A stock mutual fund lets you diversify*.^{3} **In general, that makes a stock mutual fund less risky** than a single stock because you can spread your risk by spreading your investments. With a
single stock, all your eggs are in one basket.

How many folks answered:^{1}

Correct: 43%

Incorrect: 11%

Don't know: 45%

### QUESTION 6: Compound Interest

#### 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?

- <2 years
- 2 to 4 years
- 5 to 9 years
- 10+ years
- Don't know

### ANSWER 6: **B**

#### Compound interest would double the debt in **less than five years.**^{3}

####
The rule of 72: In finance, this rule is a way to estimate an investment's doubling time. Divide the rule number (i.e., 72) by the interest percentage per period (usually years) to obtain the approximate number of
periods for doubling. Using the rule, it would be about 3.6 years, which makes the correct answer **"2 to 4 years."**

How many folks answered:^{1}

Correct: 30%

Incorrect: 42%

Don't know: 26%

### QUESTION 7: Probabilities

#### Which of the following indicates the highest probability of getting a particular disease?

- There is a one-in-twenty chance of getting the disease
- 2% of the population will get the disease
- 25 out of every 1,000 people will get the disease
- Don't know

### ANSWER 7: **A**

**A one-in-twenty chance is the highest probability of contracting a disease.**

####
To compare probabilities, first, convert each option into the same format or a percentage. When you do that, a one-in-twenty chance equals 1/20 or .05, which is 5%. Similarly, a probability of 25 out of every 1,000 equals 25/1000 or .025, which is 2.5%. Now, comparing the percentages — 5%, 2.5%, and 2% — clearly, **the largest percentage and greatest probability of contracting the disease is 5% or a one-in-twenty chance**.^{3} If you want improve your financial literacy, having knowledge about probabilities can help you in evaluating risks and potential outcomes more effectively.

How many folks answered:^{1}

Correct: 30%

Incorrect: 42%

Don't know: 26%