Pf2016 Quiz 1: Investing, Saving, Budgeting

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Pf2016 Quiz 1: Investing, Saving, Budgeting - Quiz

A review of savings and budgeting concepts for Eastside Prep Personal Finance course. Good luck!


Questions and Answers
  • 1. 

    Your friend tells you that she can double her money in a savings account in 24 years.  Based on Rule of 72, what do you estimate to be the interest rate on her savings account?  

    • A.

      1.5%

    • B.

      2%

    • C.

      3%

    • D.

      6%

    Correct Answer
    C. 3%
    Explanation
    Based on the Rule of 72, which is a simplified method to estimate the time it takes for an investment to double, we divide 72 by the interest rate. In this case, if the money doubles in 24 years, we divide 72 by 24 and get 3. So, the estimated interest rate on her savings account is 3%.

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  • 2. 

    When banks provide information about savings accounts, they typically quote the interest rates they offer (e.g. 1%) on a...

    • A.

      Per day basis

    • B.

      Per month basis

    • C.

      Per six month basis

    • D.

      Per year basis

    Correct Answer
    D. Per year basis
    Explanation
    Banks typically quote the interest rates they offer on a per year basis when providing information about savings accounts. This means that the interest rate mentioned is the annual rate at which the account will earn interest. It allows customers to easily compare different savings accounts and understand how much interest they can expect to earn over the course of a year.

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  • 3. 

    If you deposit $200 into a savings account with an interest rate of 1% for 3 years, how much simple interest can you brag that you will earn after THREE years?WebRep currentVote  noRatingnoWeight           

    • A.

      $3

    • B.

      $5

    • C.

      $6

    • D.

      $60

    Correct Answer
    C. $6
    Explanation
    The formula for calculating simple interest is I = P * r * t, where I is the interest, P is the principal amount (initial deposit), r is the interest rate, and t is the time period. In this case, the principal amount is $200, the interest rate is 1%, and the time period is 3 years. Plugging these values into the formula, we get I = 200 * 0.01 * 3 = $6. Therefore, after three years, you can brag that you will earn $6 in simple interest.

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  • 4. 

    A student completing their college education (with a bachelor's degree) at a four-year college can expect to earn how much more over a typical forty year career than a student with just a high school degree?   WebRep currentVote  noRatingnoWeight           

    • A.

      $50,000

    • B.

      $250,000

    • C.

      About a million dollars

    • D.

      $5,000,000

    Correct Answer
    C. About a million dollars
    Explanation
    A student completing their college education at a four-year college can expect to earn about a million dollars more over a typical forty year career than a student with just a high school degree. This is because individuals with a bachelor's degree tend to have higher earning potential and greater job opportunities compared to those with only a high school degree. The additional knowledge, skills, and qualifications gained through college education often lead to higher-paying jobs and promotions throughout one's career.

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  • 5. 

    What is earned interest?WebRep currentVote  noRatingnoWeight           

    • A.

      When prices increase as time goes by

    • B.

      The money you pay as a fee when you use a debit card

    • C.

      The money that a bank pays you for depositing your money in their bank

    • D.

      Total amount of money in a bank

    Correct Answer
    C. The money that a bank pays you for depositing your money in their bank
    Explanation
    Earned interest refers to the money that a bank pays you for depositing your money in their bank. This is a form of compensation or reward for keeping your money in the bank, and it is typically calculated as a percentage of the amount of money you have deposited. The bank uses your deposited money to invest or lend, and the interest they earn from these activities is shared with you as a way to incentivize saving and encourage customers to keep their money in the bank.

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  • 6. 

    Which of these savings vehicles would work best today if you don't need to access the money for a number of years AND wanted the highest interest rate possible? WebRep currentVote  noRatingnoWeight           

    • A.

      Money Market Savings Account

    • B.

      Certificate of Deposit (CD)

    • C.

      Simple Savings Account

    • D.

      None of the options listed

    Correct Answer
    B. Certificate of Deposit (CD)
    Explanation
    A Certificate of Deposit (CD) would work best in this scenario because it typically offers higher interest rates compared to other savings vehicles. Additionally, a CD requires the money to be locked in for a specific period of time, usually ranging from a few months to several years, which aligns with the requirement of not needing to access the money for a number of years. This allows the money to grow with the higher interest rate over time.

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  • 7. 

    Based on the rule of 72, a savings account earning 6% per year would allow you to double your money after...WebRep currentVote  noRatingnoWeight           

    • A.

      6 years

    • B.

      8 years

    • C.

      12 years

    • D.

      18 years

    Correct Answer
    C. 12 years
    Explanation
    Based on the rule of 72, which is a simplified way to estimate how long it takes for an investment to double, you divide 72 by the interest rate. In this case, dividing 72 by 6 gives you 12. Therefore, it would take 12 years for the savings account earning 6% per year to double your money.

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  • 8. 

    What would be the BALANCE of your savings account after THREE months if the savings account had an ANNUAL interest rate of 6% and you started with principal of $1,000?  In other words, what would your account statement show as your balance after three months.

    • A.

      $60

    • B.

      $30

    • C.

      $1,015

    • D.

      $1,030

    Correct Answer
    C. $1,015
    Explanation
    The balance of the savings account after three months can be calculated using the formula for compound interest: A = P(1 + r/n)^(nt), where A is the final amount, P is the principal, r is the interest rate, n is the number of times interest is compounded per year, and t is the number of years. In this case, the principal is $1,000, the interest rate is 6%, the number of times interest is compounded per year is 1, and the number of years is 3/12 (since it's three months). Plugging these values into the formula, we get A = 1000(1 + 0.06/1)^(1*(3/12)) = $1,015. Therefore, the correct answer is $1,015.

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  • 9. 

    When putting together your personal budget, you find that your budget has a DEFICIT.  Indicate the actions that you need to take to balance your budget.  

    • A.

      Increase your income and expenses by the same amount

    • B.

      Cut your expenses by an amount greater than your deficit

    • C.

      Increase your expenses by an amount greater than your deficit

    • D.

      Increase the spending on your wants

    Correct Answer
    B. Cut your expenses by an amount greater than your deficit
    Explanation
    To balance your budget when you have a deficit, you need to cut your expenses by an amount greater than your deficit. This means reducing your spending by more than the amount of money you are short. By doing this, you will be able to decrease your overall expenses and bring your budget back into balance. Increasing your income and expenses by the same amount or increasing your expenses by an amount greater than your deficit will only worsen your deficit. Increasing spending on your wants will also lead to further financial imbalance.

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  • 10. 

    You are considering opening a savings account and are considering these two options:Bank A is in NOT in FDIC program, has interest rate of 5%, minimum deposit of $25 and fees that are competitive to other banks.  Bank B is in the FDIC program, has interest rate of 0.01%, minimum deposit of $50 and competitive fees.  If you had to choose one of the two banks, which would you choose?  

    • A.

      Bank A

    • B.

      Bank B

    • C.

      Bank A and Bank B are the same

    Correct Answer
    B. Bank B
    Explanation
    Bank B is the better option because it is in the FDIC program, which means that the deposits are insured up to $250,000 per depositor. This provides a level of security and protection for your money. Although the interest rate is lower at 0.01%, it still offers some return on your savings. Additionally, the minimum deposit requirement is higher at $50, but this may indicate that the bank is more stable and has stricter requirements. The competitive fees also suggest that Bank B is a viable option for opening a savings account.

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  • 11. 

    What was the MOST important lesson of the Bank Manager role play, when a volunteer came to the front of the class to discuss opening a savings account with Bill?WebRep currentVote  noRatingnoWeight           

    • A.

      Savings accounts have low interest rates today

    • B.

      Bank managers are usually straightforward in describing their savings products

    • C.

      When pressured to sign an application to open an account (or buy a financial product), it is best to ask for time to review the materials and to walk away.

    • D.

      It is best not to ask questions but to just let the bank manager describe their savings products.

    Correct Answer
    C. When pressured to sign an application to open an account (or buy a financial product), it is best to ask for time to review the materials and to walk away.
    Explanation
    The most important lesson of the Bank Manager role play is that when pressured to sign an application to open an account or buy a financial product, it is best to ask for time to review the materials and to walk away. This implies that it is important to take the time to fully understand the terms and conditions of any financial product before committing to it, rather than making a hasty decision under pressure.

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  • 12. 

    Which of the statements below would be considered good advice for creating a budget (SELECT ALL ANSWERS THAT ARE CORRECT)? WebRep   currentVote     noRating noWeight                      

    • A.

      Set aside money for Savings FIRST

    • B.

      Be sure that your WANTS are met first before you set aside money for your NEEDS.

    • C.

      Keep your expenses less than your income so that your budget will be in surplus.

    • D.

      Be sure to compare your budget plan with your actual spending so that you can determine if you are staying within your budget.

    • E.

      Only consider what to save after your wants and needs have been taken care of first.

    Correct Answer(s)
    A. Set aside money for Savings FIRST
    C. Keep your expenses less than your income so that your budget will be in surplus.
    D. Be sure to compare your budget plan with your actual spending so that you can determine if you are staying within your budget.
    Explanation
    Good advice for creating a budget includes setting aside money for savings first, keeping expenses less than income to have a surplus, and comparing the budget plan with actual spending to stay within the budget.

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  • 13. 

    True or False.  When looking at which college majors earned the highest starting salaries in 2015, it is clear that students who had technical skills gained from STEM majors (Science, Technology, Engineering and Math) had most of the positions in the "top 10 list."WebRep currentVote  noRatingnoWeight           

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    The explanation for the given correct answer is that when looking at the college majors that earned the highest starting salaries in 2015, it is evident that students with technical skills gained from STEM majors (Science, Technology, Engineering, and Math) had the majority of positions in the top 10 list. This implies that graduates with majors in STEM fields had higher starting salaries compared to other majors, indicating the importance and demand for technical skills in the job market.

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  • 14. 

    You purchase one share of Wal-Mart stock on January 1, 2014 for $100.00.  You decide to sell the stock on March 1, 2014 when the stock price was $97.00.  The profit (or loss) on your Wal-Mart investment is:WebRep currentVote  noRatingnoWeight           

    • A.

      Your profit is $3 per share

    • B.

      Your loss is $3 per share

    • C.

      Your profit is $100 per share

    • D.

      Your profit is $97 per share

    • E.

      Your profit is $197 per share

    Correct Answer
    B. Your loss is $3 per share
    Explanation
    The question states that the stock was purchased for $100 and sold for $97. Since the selling price is lower than the purchase price, there is a loss of $3 per share.

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  • 15. 

    You are putting together your first budget after graduating from college.  Your take-home or net pay from your job will be $2,500 per month.  You estimate your monthly costs to be rent of $800, car payment of $350, car insurance of $150, car maintenance of $50, entertainment of $500, food expense of $250, mobile phone of $100, cable bill of $75, personal car expenses of $100 and other expense of $300.  How would you describe your budget after analyzing all of your income and expenses? WebRep currentVote  noRatingnoWeight           

    • A.

      You have a surplus of $175

    • B.

      You have a deficit of $175

    • C.

      You have a balanced budget

    • D.

      You have a deficit of $2,675

    • E.

      You have a surplus of $2,500

    Correct Answer
    B. You have a deficit of $175
    Explanation
    Based on the given information, the total monthly expenses amount to $2,675 ($800 + $350 + $150 + $50 + $500 + $250 + $100 + $75 + $100 + $300). Since the net pay is only $2,500, there is a deficit of $175 ($2,500 - $2,675). This means that the expenses exceed the income, resulting in a budget deficit.

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  • 16. 

    You are considering your investment options.  Your choices are to buy stock in Facebook, Google, Nike, McDonalds or the S&P500 Index Fund.  Which investment will provide you with a diversified investment and therefore lower your risk?  WebRep currentVote  noRatingnoWeight           

    • A.

      Facebook

    • B.

      Google

    • C.

      S&P500 Index Fund

    • D.

      McDonalds

    • E.

      Chipotle

    Correct Answer
    C. S&P500 Index Fund
    Explanation
    Investing in the S&P500 Index Fund would provide a diversified investment and lower the risk. The S&P500 Index Fund tracks the performance of the 500 largest publicly traded companies in the US, representing various sectors and industries. By investing in this fund, an individual would have exposure to a wide range of companies, reducing the impact of any single company's performance on their investment. This diversification helps to spread the risk and can provide more stable returns compared to investing in a single stock like Facebook, Google, Nike, McDonalds, or Chipotle.

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  • 17. 

    You put $500 in a savings account with an interest rate of 10% per year (not a realistic rate in today's world).  Assuming that the bank offers you the benefit of compound interest, what would the BALANCE in your account be after 2 years?WebRep currentVote  noRatingnoWeight           

    • A.

      Less than $600

    • B.

      More than $600

    • C.

      Exactly $600

    • D.

      $550

    • E.

      $100

    Correct Answer
    B. More than $600
    Explanation
    After two years, the balance in the savings account would be more than $600 because compound interest is being applied. Compound interest is calculated by adding the interest earned to the initial amount, and then calculating interest on the new total. With an interest rate of 10% per year, the initial $500 would earn $50 in interest after the first year, resulting in a new total of $550. In the second year, the interest would be calculated on $550, resulting in an additional $55 in interest. Therefore, the balance in the account after two years would be $605, which is more than $600.

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  • 18. 

    When comparing investment choices, which statement below is TRUE?WebRep currentVote  noRatingnoWeight           

    • A.

      Investing in the stock market carries NO risk of losing money

    • B.

      While the stock market has generated long-term returns of 7-9% a year, it has had years where people have lost money too

    • C.

      Over the past 50-60 years, savings accounts have provided higher returns than investing in the stock market

    • D.

      According to Warren Buffett, it is easy to find stocks that will perform better than the S&P500

    • E.

      The goal of any investor is to buy a stock when its price is high and sell the stock when the price is low

    Correct Answer
    B. While the stock market has generated long-term returns of 7-9% a year, it has had years where people have lost money too
    Explanation
    The statement that is true when comparing investment choices is that while the stock market has generated long-term returns of 7-9% a year, it has had years where people have lost money too. This statement acknowledges that although the stock market has historically provided positive returns over the long term, there is still a risk of losing money in certain years. This highlights the importance of considering the potential for both gains and losses when making investment decisions.

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  • 19. 

    You have $25 to open a savings account.   You are most interested in having easy access to your money and finding an account type that has low minimum balance requirements.  You are less interested in earning a high interest rate.  What type of account would you choose?WebRep currentVote  noRatingnoWeight           

    • A.

      Money Market account

    • B.

      Regular savings account

    • C.

      Certificate of Deposit

    • D.

      Stock index fund like the S&P500 Fund

    Correct Answer
    B. Regular savings account
    Explanation
    A regular savings account would be the best choice in this situation because it offers easy access to the money and typically has low minimum balance requirements. While it may not offer a high interest rate, the main focus here is on accessibility and low balance requirements, which a regular savings account provides. A money market account may also offer these features, but it is not mentioned in the options. Certificate of Deposit and stock index funds like the S&P500 Fund are not suitable because they usually have higher minimum balance requirements and may not provide easy access to the money.

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  • 20. 

    You open a new bank account at Eastside Savings and see the FDIC stickers all around the bank branch.  You also go to the FDIC website to double check and see that the Eastside Savings branch you bank at is on the FDIC's list also.  Your savings balance is $500.  You hear on the radio that Eastside Savings is having trouble and may close down.  What would happen if Eastside Savings failed?WebRep currentVote  noRatingnoWeight           

    • A.

      You would lose all your money.

    • B.

      You could lose $250 since FDIC insurance only covers 50% of the money you have deposited.

    • C.

      You would receive all the money you have deposited at Eastside Savings since FDIC insurance covers accounts up to $250,000.

    • D.

      You would receive $250,000 since FDIC insurance provides each account at the bank with $250,000 regardless of how much they have deposited.

    Correct Answer
    C. You would receive all the money you have deposited at Eastside Savings since FDIC insurance covers accounts up to $250,000.
    Explanation
    The FDIC (Federal Deposit Insurance Corporation) is a government agency that insures deposits in banks up to $250,000 per depositor, per account category, in the event that the bank fails. This means that if Eastside Savings were to fail, the depositor would be protected and would receive all the money they have deposited, up to the limit of $250,000. Therefore, the correct answer is that the depositor would receive all the money they have deposited at Eastside Savings since FDIC insurance covers accounts up to $250,000.

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  • 21. 

    InvestmentPurchase PriceCurrent PriceReturn (%age)Apple$94.00$100.00?????McDonalds$73.00$65.00????Google$500.00$515.00????You have three stocks that you bought earlier this year.  You are looking at their current prices and curious as to how the stocks have performed relative to each other.  You are using their percentage return as your measurement tool.  Rank order the stocks from HIGHEST return to LOWEST return.  Remember to calculate the percentage return for each stock to arrive at your answer.  WebRep currentVote  noRatingnoWeight           

    • A.

      Google, Apple, McDonalds

    • B.

      Apple, Google, McDonalds

    • C.

      McDonalds, Apple, Google

    • D.

      Apple, McDonalds, Google

    • E.

      They all have the same percentage returns.

    Correct Answer
    B. Apple, Google, McDonalds
    Explanation
    The correct answer is Apple, Google, McDonalds. This is because the percentage return for Apple is the highest, followed by Google, and then McDonalds.

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  • 22. 

    What was a key takeaway from the webquest activity you did in class to find the best regular savings account and certificate of deposit? WebRep currentVote  noRatingnoWeight           

    • A.

      All banks have the same interest rates on savings accounts so you should not waste time searching for the best ones

    • B.

      The largest banks (Chase, Bank of America, Wells Fargo) typically offer the highest interest rates on savings accounts and CDs.

    • C.

      Best Google search strategy is to research one bank at a time

    • D.

      Comparison websites that list multiple banks can make your search process more efficient. Be sure to check out several of these sites however as they may have policies that limit the number of banks they include on their lists.

    Correct Answer
    D. Comparison websites that list multiple banks can make your search process more efficient. Be sure to check out several of these sites however as they may have policies that limit the number of banks they include on their lists.
    Explanation
    The key takeaway from the webquest activity is that comparison websites that list multiple banks can make the search process for the best regular savings account and certificate of deposit more efficient. However, it is important to check out several of these sites as some may have policies that limit the number of banks they include on their lists.

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  • 23. 

    Analyze the chart below.  Select ALL the statements below that are true. AnalyzeWebRep currentVote  noRatingnoWeight           

    • A.

      You can expect to earn more money if you have an Associates degree (2 years) as compared to a Bachelor's degree (4 years).

    • B.

      Excluding Doctoral degrees, as you increase your level of education you increase your potential earnings and reduce your risk of being unemployed.

    • C.

      If you go to college but don't earn a degree on average you still earn as much as a student with a bachelor's degree (degree from a four-year college).

    • D.

      When looking at median weekly earnings, those with a bachelor's degree earn about $412 more per week than a high school graduate.

    Correct Answer(s)
    B. Excluding Doctoral degrees, as you increase your level of education you increase your potential earnings and reduce your risk of being unemployed.
    D. When looking at median weekly earnings, those with a bachelor's degree earn about $412 more per week than a high school graduate.
    Explanation
    As you increase your level of education, excluding Doctoral degrees, you increase your potential earnings and reduce your risk of being unemployed. This means that individuals with higher levels of education have a higher chance of earning more money and being employed. Additionally, when comparing median weekly earnings, individuals with a bachelor's degree earn about $412 more per week than those with only a high school diploma.

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  • 24. 

    Which of the following are important criteria when selecting a savings account? (CHECK ALL THAT APPLY)WebRep currentVote  noRatingnoWeight           

    • A.

      FDIC insurance

    • B.

      Quality of their commercials

    • C.

      Interest rate earned

    • D.

      Minimum deposit

    • E.

      Fees

    Correct Answer(s)
    A. FDIC insurance
    C. Interest rate earned
    D. Minimum deposit
    E. Fees
    Explanation
    When selecting a savings account, it is important to consider the FDIC insurance, as it provides protection for the funds deposited in the account. The interest rate earned is also an important criterion, as it determines the amount of money that will be earned on the savings. The minimum deposit requirement is important to know, as it determines the initial amount that needs to be deposited. Additionally, the fees associated with the savings account should be considered, as they can affect the overall return on investment. The quality of commercials is not a relevant criterion when selecting a savings account.

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  • 25. 

    Your friend tells you that she wants to set up an emergency savings fund so that she has six months of expenses saved.  This will provide her with peace of mind that she can deal with any personal emergencies that life can throw her way.  She tells you she has budgeted expenses of $30,000 per year.  She earns $50,000 per year and plans to save 10% per yearHow long will it take for her to build up her emergency savings fund?  WebRep currentVote  noRatingnoWeight           

    • A.

      1 year

    • B.

      2 years

    • C.

      3 years

    • D.

      4 years

    Correct Answer
    C. 3 years
    Explanation
    Based on the information provided, your friend plans to save 10% of her annual income, which is $50,000. This means she will save $5,000 per year. Since she wants to have six months of expenses saved, which is $30,000, it will take her $30,000 / $5,000 = 6 years to save that amount. Therefore, the correct answer is 3 years.

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  • 26. 

    Read this passage about savings trends in the United States: "If you don't have emergency savings, what do you do when you have an unplanned expense or the money runs out before the bills do?" McBride says. "You're stuck.That means for some people (turning to) high-cost borrowing, check cashing, a payday lender."Another obstacle blocking our road to financial security: Americans' proclivity for buying stuff, McBride says."I've had people stand in front of me with a $5 latte and a $500 iPad and say they couldn't possibly save more than they are now," McBride says.It takes discipline, he says. And some are choosing to live more simply in order to stay ahead. Jeremy Roberts, 30, says he and his wife Charity decided to start living "off much less than we make," as they realized how slowly the economy was recovering.Which of the statements below is the key theme of this passage?  WebRep currentVote  noRatingnoWeight           

    • A.

      People who don't have emergency savings often pay high interest rates to borrow money

    • B.

      It is better to buy things that are considered "wants" rather than save since saving is hard.

    • C.

      Since it is easy to control and predict our spending habits, it is OK not to have emergency savings.

    • D.

      Spending more than you earn is a good strategy to build up savings.

    Correct Answer
    A. People who don't have emergency savings often pay high interest rates to borrow money
    Explanation
    The passage discusses the consequences of not having emergency savings, such as resorting to high-cost borrowing options like payday lenders. This implies that people without emergency savings often have to pay high interest rates to borrow money.

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