Financial Literacy Quiz-Answers
Here are the answers to the Quiz
The Money Professors’ Financial Literacy Answers
1If a movie ticket costs $10 today, then about how much will a movie ticket cost in 10 years, assuming the price increases at an inflation rate of 3% per year?
Answer: A bit more than $13
Since inflation is 3% per year, but inflation compounds, then total inflation will be combined for more than 30% over the next ten years. In fact, inflation would be a total of 34%, so the ticket would cost $13.40.
2If you had invested money in the U.S. stock market over any 30 year period, about what rate of return would you have received?
Answer: A 9% gain
While exact numbers differ, depending on how you count investment fees, it is safe to assume a 9% return over any 30 year period in the past. While past performance does not always indicate future results, it is a commonly accepted practice to assume future returns will mirror historic returns.
3If your retirement plan at work offers a 50% match on your contributions and you invest $100 per month, how much money would your employer add to the account in one year?
Since you are contributing $100 each month and the company matches 50% that would be $100 X 0.50 X 12 = $50 X 12 = $600
4Your credit card charges 16% interest rate and requires a minimum payment of 4% of the balance (but at least $10) each month. If you never make another purchase on your card, and you owe $10,000, about how long will it take to pay off the credit card?
Answer: About 14 years
In fact, it would take 13 years and 11 months. That is because the minimum payment continues to decrease as the amount you owe gets smaller. Unlike loans where the payment stays the same, credit cards payment is based on how much you owe, which leads to longer term debt that costs lots of money in interest expense.
5You are in the 25% marginal tax bracket and have the option of taking a $2,000 tax credit or a $2,000 tax deduction, but not both. Which do you choose?
Answer: The $2,000 tax credit
A tax credit reduces your tax liability by the amount of the credit itself, so $2,000 in this case. A deduction only reduces it based on your marginal tax rate so 25% X $2,000 = $500.
6The availability of money that is not yet earned is called:
Unlike debt, which is money you actually owe, credit is the amount you have available to borrow – but have not yet actually borrowed it.
7When you use your debit card to make a purchase, but hit the ‘Credit’ key at checkout:
Answer: It will not affect your credit score
Pressing the debit key means you will use your PIN and may be able to get cash back as well. Pressing the credit key simply means you may have to sign for the purchase but cannot get cash back. Either way, the money comes out of your account immediately. The difference is really what takes place behind the scenes between the merchant and the credit card company.
8A $205,000 mortgage at 5% for 30 years has a monthly payment (principal and interest only) of $1,100. About how much will you pay each month for a 15-year mortgage if the interest rate is the same?
Cutting the time to pay off your mortgage in half does not require double the payment! In fact, your monthly payment would be $1,621. Amazing what a few hundred extra dollars can do to your mortgage!
9When you lease a car, you are essentially:
Answer: Renting a car
When you lease, you are renting a car for about 2 or 3 years. You are limited to a specific number of miles and must return the car in good condition. It is the most expensive way to own a new car if you do it every few years, unless you are going to buy a new car every three years anyway… which is another conversation.
Answer: All of the car loan applications will be treated as a single inquiry on your report and will lower your score a small amount
While each inquiry shows up on your credit report, the credit scoring agency understands that people shop around for certain loans, such as cars and mortgages. So they count all of your credit inquiries within a short period of time as a single inquiry.
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