# Financial Literacy Exam Quiz! Trivia

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Can you get past this financial literacy quiz? There is a common saying that to make money; you need to spend money, which is the backbone for every investment as one has to invest to reap more. How conversant are you with the basics of making financial decisions, investments, and some of the things to look out for in your business? This quiz will help test your understanding. Do give it a shot!

Questions and Answers
• 1.

### If your investment loses 20% of its value, what percentage of return will you need to break even?

• A.

20%

• B.

More than 20%

• C.

Less than 20%

• D.

Don't know

Correct Answer
B. More than 20%
Explanation
If you invested \$1000 and incurred a 20% loss, your investment would then be worth \$800. To get back to your original \$1000 value, you would need a gain of \$200, which would be \$200/\$800 x 100 = 25% gain.

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• 2.

### An investment's maximum decline from a previous peak in value is known as its:

• A.

Loss ratio

• B.

Drawdown

• C.

Negative gain

• D.

Don't know

Correct Answer
B. Drawdown
Explanation
Quoted as a percentage, drawdown helps define an investment's level of risk. For example, a peak-to-trough loss of \$200 from a \$1000 investment would be a 20% drawdown.

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• 3.

### You can’t lose money investing in which of the following:

• A.

Diversified mutual funds

• B.

Securities backed by home mortgages

• C.

US Treasury bonds because they are backed by the US Government

• D.

Investment-Grade bonds from Fortune 500 companies

• E.

None of the above

• F.

Don’t know

Correct Answer
E. None of the above
Explanation
Nearly all investments have some risk of loss, including government-backed bonds. JP Morgan estimates that a 1% rise in interest rates could result in as much as a 20% fall in 30-year Treasury Bond prices.

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• 4.

### Mutual funds are protected from market losses by:

• A.

The Securities Investment Protection Corporation (SIPC)

• B.

The Federal Deposit Insurance Corporation (FDIC)

• C.

Mutual Fund Insurance Corporation (MFIC)

• D.

None of the above

• E.

Don’t know

Correct Answer
D. None of the above
Explanation
Market losses are not covered by insurance. Many mutual funds carry SIPC insurance, but it only protects an investor against investment house fraud and mismanagement, not market losses.

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• 5.

### You invested \$1,000 in stock two years ago. The stock’s trading price declined 40% in the first year and rose 40% the next year. As a result, you have:

• A.

Lost money

• B.

Made money

• C.

Broken even

• D.

Don’t know

Correct Answer
A. Lost money
Explanation
This question is similar to the previous one on the breakeven percentage. A 40% decline on \$1000 would leave you at \$600 after the first year. A 40% gain in the second year would only net an additional \$240, giving you a final balance of \$840. You would need a gain of 67% to get back to your original investment.

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• 6.

### Which of the following Treasury bonds would be impacted more by a change in interest rates?

• A.

5 year

• B.

10 Year

• C.

30 Year

• D.

They would all be impacted about the same

• E.

Don’t know

Correct Answer
C. 30 Year
Explanation
It is estimated that a 1% interest rate change would impact 5-year Treasury bond yields by 3.7%. 10-year by 9.2% and 30-year by 20.3%.

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• 7.

### Index mutual funds are:

• A.

Funds indexed to keep up with inflation

• B.

Groups of stocks in a particular market sector, like technology

• C.

Mutual funds designed to mimic an Index, like the S&P 500 Index

• D.

Don’t know

Correct Answer
C. Mutual funds designed to mimic an Index, like the S&P 500 Index
Explanation
Index funds seek to match the movements of a specific market index. Although they may have lower fees, they are not designed to limit losses on the index they follow.

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• 8.

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

• A.

More than \$102

• B.

Exactly \$102

• C.

Less than \$102

• D.

Don’t know

Correct Answer
A. More than \$102
Explanation
If the interest was only compounded annually, the amount in the savings account would be \$110.41 after five years.

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• 9.

### 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?

• A.

More

• B.

Same

• C.

Less

• D.

Don't know

Correct Answer
C. Less
Explanation
In this example, a \$100 savings account would have a value of \$101.00 after one year, but because of inflation, its buying power would only equal \$98.98 in today's dollars.

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• 10.

### If interest rates rise, what will typically happen to bond prices?

• A.

Rise

• B.

Fall

• C.

Stay the same

• D.

No relationship

• E.

Don't know

Correct Answer
B. Fall
Explanation
For bonds previously issued on the open market, bond prices typically move inversely to interest rates. When interest rates go up, bond prices generally fall.

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• 11.

### 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

• B.

False

• C.

Don't know

Correct Answer
A. True
Explanation
On a \$100,000 mortgage at 5.00%, the 15-year term has monthly payments of \$790.79, total interest paid \$42,343. The same mortgage over a 30-year term has monthly payments of \$536.82, but the total interest paid is \$93,256, over twice as much.

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• 12.

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

• A.

True

• B.

False

• C.

Don't know

Correct Answer
B. False
Explanation
Stock mutual funds are designed to lessen the risk of owning individual stocks by diversifying investments across many stocks and through the use of professional fund managers.

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Our quizzes are rigorously reviewed, monitored and continuously updated by our expert board to maintain accuracy, relevance, and timeliness.

• Current Version
• Mar 21, 2023
Quiz Edited by
ProProfs Editorial Team
• Jul 09, 2013
Quiz Created by
Henryrohlfs

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