APRIL: Financial Literacy Month
Presented by The Student Support and Advocacy Center’s Financial Well-Being Team
ANSWERS to Test your Financial Literacy QUIZ ~
- Suppose you have $100 in a savings account earning 2 percent interest a year. After 5 years, how much would you have?
More than $102 Exactly $102 Less than $102 Don’t know
A: More, because interest will generally compound over time. The other responses reflect a misunderstanding of the concept of interest accrual. It is always good to find out how your bank or credit union calculates interest.
- Imagine that the interest rate on your savings account is 1% a year and inflation is 2% a year. After 1 year, would the money in the account buy more than it does today, or exactly the same, or less than today?
More than today Exactly the same Less than today
A: Less than today. Inflation is the rate at which the price of goods and services rises. If the annual rate of inflation is 2% but the savings account earns only 1 percent, the cost of goods and services has outpaced the buying power of the money in the savings account that year. In short, your buying power has not kept up with inflation.
- If interest rates rise, what will typically happen to bond prices?
Rise Fall Stay the same There is no relationship
A: Fall. When interest rates rise, bond prices fall. Conversely when interest rates fall, bond prices rise. This is because as interest rates go up, newer bonds come to the marketplace paying higher interest yields than older bonds already in the hands of investors, making older bonds worth less.
- 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.
A: True. Assuming the same interest rate for both loans, you will pay less in interest over the life of a 15-year loan than you would with a 30-year loan because you repay the principal at a faster rate. This also explains why the monthly payment for a 15-year loan is higher. Let’s say you get a 30-year mortgage at 6 percent on a $150,000 home. You will pay $899 a month in principal and interest charges. Over 30 years, you will pay $173,757 in interest alone. But a 15-year mortgage at the same rate will cost you less. You will pay
$1,266 each month but only $77,841 in total interest—nearly $100,000 less.
- True or false: Buying a single company’s stock usually provides a safer return than a stock mutual fund.
A: False. In general, investing in a stock mutual fund is less risky than investing in a single stock because mutual funds offer a way to diversify. Diversification means spreading your risk by spreading your investments. With a single stock, all your eggs are in one basket. If the price falls when you sell, you lose money. With a mutual fund that invests in the stocks of dozens (or even hundreds) of companies, you lower the chances that a price decline for any single stock will impact your return. Diversification generally may result in a more consistent performance in different market conditions.