ANSWERS: Test Your Financial IQ
Question #1: Certificates of deposit with longer maturities usually provide higher interest rates than those with shorter maturities.
The answer is a.
Usually institutions are willing to pay higher interest rates if you are willing to commit to leaving your money on deposit for longer periods. If you prepared a graph and plotted interest rates on the vertical axis and time periods along the horizontal axis, you would have what is sometimes called a "yield curve."
Question #2: Why is the Federal Reserve's interest rate policy important?
a. The Fed dictates what interest rates banks pay on savings accounts and CDs.
b. The Fed sets interest rates to make the stock market go up or down.
c. The Fed tries to keep inflation under control and "influence" the economy by setting the interest rates banks pay and receive for overnight borrowing.
The answer is c.
The stated over-riding objective of the Federal Reserve Board of Governors is to keep inflation in check. Their "overnight borrowing rate" strongly influences overall interest rates and the economy. Many institutions use this rate to make "prime rate" decisions that affect consumer borrowing on everything from credit cards to mortgages.
Question #3: Which of the following is a benefit of an automatic savings plan?
b. Helps control spending by moving funds automatically into a savings account
c. Develops a good savings habit
d. All of the above
The answer is d.
Automatic savings plans can be the easiest way to save. By having funds either taken from your paycheck or automatically transferred from your checking account into a savings account, you accumulate funds over time, put your money to work faster and develop a valuable fiscal habit of saving.
Question #4: Interest on U. S. Savings Bonds continues forever.
The answer is b.
- U. S. Savings Bonds have been popular ways to save for over 60 years. However, some types of bonds stop paying interest after a period of years. The following bonds are no longer paying interest as of November 8, 2010:
- Series EE Bonds – Issued January 1980 through November 1980.
- Series HH Bonds – Issued from January 1980 through November 1990.
- Savings Notes – All issues.
- Series A, B, C, D, E, F, G, H, J and K – All issues.
If you have one of these bonds, you should cash them in and put your money back to work.
Question #5: What does the "the rule of 72" mean?
a. Years that end in 7 or 2 have usually produced high investment returns.
b. An amount of money roughly doubles when the interest rate and the time period equals 72.
The answer is b.
The "Rule of 72" is a good estimation technique to understand how funds grow with compound interest. Money doubles when the earnings rate times the number of years equals 72. For example, money doubles in 10 years when it earns 7.2 percent and in 7.2 years if it earns 10 percent.
Question #6: Mortgage payments are made up of interest and principal repayment. Which of the following is true?
a. The mix of interest and principal repayment remains the same over the life of the mortgage.
b. In the early years of a mortgage, most of the payment is interest.
c. You pay all the interest first, then pay off the principal.
d. In the early years of a mortgage, most of the payment is principal.
The answer is b.
The great majority of mortgage payments in the early years is comprised of interest. It is in the later years when more and more of your payments are used to pay down the mortgage.
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