1. Interest
Suppose you have $100 in a savings account and the interest rate was 2% per year. After 5 years, how much you would have in the account if you left the money to grow?
Possible Answers
A) More than $102.
B) Exactly $102.
C) Less than $102.
Correct Answer
The correct answer is: A), more than $102. Because 2% interest on $100 in a year is $2, so after year 1 you have $102 — and then over the remaining 4 years, the interest grows on that $102, and so on. And that’s why compound interest has been called “the 8th wonder of the world.”
2. Inflation
Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After one year, how much would you be able to buy with the money in this account?
Possible Answers
A) More than today.
B) Exactly the same as today.
C) Less than today.
Correct Answer
The correct answer is C), less than today, because if inflation is 2% , prices go up 2%. But if you only earned 1% in your saving account, you basically can buy less.
3. Diversification
Is the following statement is true or false: buying a single company stock usually provides a safer return than a stock mutual fund.
Possible Answers
A) True
B) False
Correct Answer
The correct answer is true. A single company is a lot riskier than a basket of stocks. Don’t put all your eggs in one basket.
Everything You Always Wanted to Know About Money (but Were Afraid to Ask)
