Updated: May 21, 2021 by FinPins
Financial Literacy Quiz
Take the FREE financial literacy quiz here and see how many of the 5 basic questions you get right. The main motive of this website is to make financial literacy easily accessible to everyone. Evaluating the current state of knowledge with the financial literacy quiz is a good starting point. The average American can score 3 or less on this quiz of 5 questions. Can you beat that score? Don’t worry if you get a few questions wrong, we have also compiled complete and detailed solutions to the financial literacy quiz below. In case something is unclear, we are here to help without any judgements. Simply drop an email to [email protected] with the subject “Help on Financial Literacy Quiz”, and we’ll get back to you soon!
Are you smarter than the average American? Can you prove that by scoring 3 or more on the financial literacy quiz?
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.
Suppose you have $100 in a savings account earning 2 percent interest a year. After five years, how much would you have?
Imagine that the interest rate on your savings account is 1 percent a year and inflation is 2 percent a year. After one year, would the money in the account buy more than it does today, exactly the same or less than today?
If interest rates rise, what will typically happen to bond prices? Rise, fall, stay the same, or is there no relationship?
True or false: Buying a single company's stock usually provides a safer return than a stock mutual fund.
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Solutions to Financial Literacy Quiz
Suppose you have $100 in a savings account earning 2 percent interest a year. After five years, how much money would you have?
Assuming simple interest is being discussed here
- In the first year the $100 will earn an interest of 2/100 * $100 = $2
- In the second year, the $100 will earn another $2.
- Likewise, in years 3, 4, and 5 also the $100 will earn $2 each year.
- After five years, the total amount in savings account will be $100 + 5 * $2 =$110
Assuming compound interest is being discussed here (when interest earned in a previous period also earns interest in subsequent periods)
- In the first year, the $100 will earn $2 interest.
- At the beginning of year 2, $102 is available in the savings account. This entire $102 will earn 2% interest. 2/100 * $102 = $2.04
- At the beginning of year 3, $104.04 is available in savings account. This can be calculated as (1 + 0.02) ^ 2 * $100 = $104.04
- Likewise, at the end of year five, (1 + 0.02) ^ 5 * $100 = $110.41 is available in the savings account.
For the purpose of this quiz, it doesn’t matter whether you compute using the simple interest or compound interest formula, the correct answer is More than $102
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 account buy more than it does today, exactly the same or less than today?
Inflation is a term that describes a general increase in price of something. Effectively, it tells us that if there is positive inflation in the economy, the value of money is going down.
Starting with $100 in savings account today, the amount next year will be $101 (1% interest rate on $100).
A 2% inflation means that something that can be purchased for $100 today, will cost $102 next year.
Since the cost next year will be $102 for the same quality and quantity of product and we will have $101 available at that time, we will have to compromise on either quality or quantity.
Hence, for similar quality product, the money will buy LESS than what it buys today.
If interest rates rise, what will typically happen to bond prices?
There is inverse relationship between bond price and interest rates (yield). So, as interest rates rise, the bond prices will FALL.
Read more here for a comprehensive understanding of the topic.
A 15-year mortgage typically requires higher monthly payment than a 30-year mortgage but total interest over the life of loan will be less. True or False?
Conceptually, a 15-year mortgage will try to spread the principal payment over a shorter period of time as compared to a 30-year mortgage, so the monthly payments will be higher.
Since you pay off the mortgage quickly, the interest payments will also be lower over the life of the loan.
Let’s use the mortgage calculator to confirm our belief.
15-year mortgage ($200,000)
- Monthly payment = $1,479
- Total interest over life of loan = $66,288
30-year mortgage ($200,000)
- Monthly payment = $955
- Total interest over life of loan = $143,739
As we can see, the monthly payments are higher ($1,479 > $955), but the interest paid ($66,288 < $ 143,739 ) overall is much lower for the 15-year mortgage. The answer is TRUE.
True or False: Buying a single company’s stock usually provides a safer return than a stock mutual fund.
A single company’s stock tends to be more volatile than a stock mutual fund which is a diversified portfolio. Generally, well diversified funds are more stable than a single stock.
So, the answer is FALSE.
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