Are You Street Smart?

1. What is interest?

Interest is money that is easy to understand

Interest is "rent on money"

It means you are interested in money

Interest is simply "rent on money" that you borrow. You pay a price to use someone elses money.

Explanation

Interest is simply "rent on money" that you borrow. You pay a price to use someone elses money.

2. What is simple interest?

Interest that is simple to understand

An interest rate that is a % of the principal borrowed and does not compound

Compound interest that is simplified by a calculator

A zero percent interest rate

Simple interest is a % of the principal borrowed and does not compound

Explanation

Simple interest is a % of the principal borrowed and does not compound

3. Which type of interest, over a period of time, will pay you more?

Compound

Simple

Compound interest can make you very wealthy over a long period of time because it pays "interest upon interest"

Explanation

Compound interest can make you very wealthy over a long period of time because it pays "interest upon interest"

4. The "tool from the school" of economics used to make the best choices is called:

My best guess

Flip a coin

Marginal analysis

Wing it, ready aim fire

The tool from the school of economics to make the best choices is "marginal analysis" and means "extra" or "incremental"

Explanation

The tool from the school of economics to make the best choices is "marginal analysis" and means "extra" or "incremental"

5. What is a "bond"

It's lending money to a company and expecting it to be paid back in full to you, plus the "coupon rate" (the stated interest rate)

It's a railroad term

It's a type of glue

It's a mix between ownership equity and a debt instrument

When you purchase bonds you are "loaning money" to a company but are not an "owner" of the firm, which is different than stock

Explanation

When you purchase bonds you are "loaning money" to a company but are not an "owner" of the firm, which is different than stock

6. What is compound interest?

An interest rate that compounds and complicates your life

An interest rate mothod that pays interest upon interest

A compound rate that is paid back early

A complicated problem in finance

Compound interest is "interest upon interest"

Explanation

Compound interest is "interest upon interest"

7. What does it mean to own "stock" in a corporation?

It means to own part of a livestock stockyard

It means you are part owner of a company by purchasing stock of the company

It means you loan money to the company, but are not an "owner"

It's just like a bond - you lend money and expect it to be paid back

It means you are part owner of the company by purchasing some of it's stock...

Explanation

It means you are part owner of the company by purchasing some of it's stock...

8. Unlimited wants and limited resources is known as the:

Economizing problem

Dismal science

Personal issues with money

Whining people who want something for nothing

The economizing problem is "we as humans have unlimited wants and limited resources" so we have to make choices

Explanation

The economizing problem is "we as humans have unlimited wants and limited resources" so we have to make choices

9. If you borrow $1000 at a 10% simple interest rate, how much will you pay back if it is due in one year?

$1010

$1050

$1100

$1155

$1000 x 10% = $100. Add $100 to the $1000 and you get $1100.

Explanation

$1000 x 10% = $100. Add $100 to the $1000 and you get $1100.

10. Nothing in life is free - NOTHING. What is the definition of "opportunity cost?"

The cost of opportunities in life

The cost of the "next best alternative I would do with my time or money"

The high cost of opportunistic living

Opportunity cost is the cost of the "next best opportunity I would do with my time or money"

Explanation

Opportunity cost is the cost of the "next best opportunity I would do with my time or money"

11. What does "the present value of future cash flows" mean?

Money in the future is worth more

Money expected in the future, discounted at a % interest rate that equates it to present value, or "in today's dollars"

A Christmas present that is valued at high interest

Money in the present with interest added to get a future value

It is simply taking future cash flows and "discounting them" at a certain percentage rate to convert them to today's dollars. Vary important tool in finance.

Explanation

It is simply taking future cash flows and "discounting them" at a certain percentage rate to convert them to today's dollars. Vary important tool in finance.

12. The underlying reasoning behind marginal analysis is:

Is the marginal benefit greated than the marginal cost?

Is the marginal input of labor greater than the marginal cost?

Is the marginal revenue from producing an extra unit greated than the marginal cost to produce that extra unit?

All the above

All are examples of using marginal analysis

Explanation

All are examples of using marginal analysis

13. If the marginal cost of adding x unit is $1000, and the marginal PROFIT is $1200, should you add the marginal cost?

Yes

No

I don't know

Yes because the marginal profit of $200 is greater than the marginal cost

Explanation

Yes because the marginal profit of $200 is greater than the marginal cost

14. From the above, what is the marginal revenue?

$30,000

$80,000

$50,000

$20,000

The marginal revenue is $20,000, since you added $30,000 in cost, the "extra revenue" above cost is $20,000.

Explanation

The marginal revenue is $20,000, since you added $30,000 in cost, the "extra revenue" above cost is $20,000.

15. Which is more valuable: a dollar now or in the future, or in between?

A dollar now

A dollar in the future

A dollar right between the current date and the specific future date

A dollar now is worth more than a dollar in the future. This is because a dollar in the future has less purchasing power, due to inflation, risk, and other factors.

Explanation

A dollar now is worth more than a dollar in the future. This is because a dollar in the future has less purchasing power, due to inflation, risk, and other factors.

16. Most credit card companies charge which type of interest rate?

Simple

Compound

Mixed

No interest rate

Most credit card companies charge compound interest

Explanation

Most credit card companies charge compound interest

17. The field of economics is the study of:

Money

Resources

Interest rates

The science of making choices with limited resources

Economics is the study of making choices with resources

Explanation

Economics is the study of making choices with resources

18. What is the greatest influencer on interest rates?

Time value of money

Risk

Time preference for consumption

Greedy corporate lawyers

Generally risk is the greatest influencer on the interest rate - the higher the risk, the higher the interest rate

Explanation

Generally risk is the greatest influencer on the interest rate - the higher the risk, the higher the interest rate

19. If an additonal salesperson cost $30,000 a year to hire, but will bring in an additional $50,000 in sales, what is the marginal cost of hiring the new salesperson?

$30,000

$50,000

$20,000

$80,000

The marginal cost is $30,000

Explanation

The marginal cost is $30,000

20. Who said "Compound interest is the greatest invention of the 20th century?"

Richard Nixon

John F. Kennedy

Albert Einstein

Alan Greenspan

Albert Einstein is attributed to saying "Compound interest is the greatest invention of the 20th century." This statement reflects Einstein's recognition of the power and impact of compound interest, which allows for exponential growth of investments over time. Einstein's endorsement of compound interest highlights its significance in the field of finance and its potential for wealth accumulation.

Explanation

Albert Einstein is attributed to saying "Compound interest is the greatest invention of the 20th century." This statement reflects Einstein's recognition of the power and impact of compound interest, which allows for exponential growth of investments over time. Einstein's endorsement of compound interest highlights its significance in the field of finance and its potential for wealth accumulation.