Module 1 quiz Financial football

Post date: Mar 15, 2013 5:37:14 PM

Answer the following questions from the Information below.

Your answer on this Answer Form

MODULE 1 // QUIZ

Answer the following questions:

1. What is principal?

2. Describe the difference between a fixed and variable interest rate.

3. True or false: Liquidity refers to how accessible your money is to you.

4. Which typically earns more interest, a savings account or a CD?

5. True or false: Interest rates of checking accounts are often higher than those for savings accounts.

6. What is APR?

7. What is the rule called that helps you determine how long your money takes to double in savings?

8. List three common reasons people save money.

9. True or false: If you need constant access to your funds, a traditional savings account is a good

savings option.

10. Experts suggest you should try to save what percentage of your income?

Compound interest:

The following formula shows how to calculate compound interest annually.

Year 1:

$____________ x ____________ = $____________+ $____________ = $____________

Principal Interest Rate Interest Earned Principal New Principal

(ex: 5% = .05) for Following Year

Year 2:

$____________ x ____________ = $____________+ $____________ = $____________

Principal Interest Rate Interest Earned Principal New Principal

(ex: 5% = .05) for Following Year

Year 3:

$____________ x ____________ = $____________+ $____________ = $____________

Principal Interest Rate Interest Earned Principal New Principal

(ex: 5% = .05) for Following Year

Based on the above formula for compound interest, how much total savings would you have:

If you put $100 in a savings account with a 3% APR for 2 years?

If you put $500 in a CD with a 5% APR for 3 years?

If you put $1,000 in a money market account with a 4% APR for 4 years?

If you put $5,000 in a CD with a 6% APR for 5 years?

The rule of 72 provides an easy way to obtain a rough estimate of how quickly your money can grow

based on a compounded fixed interest rate. Divide 72 by the interest rate you are earning and that will

tell you the number of years it will take to double your money. You can also divide 72 by the number of

years you want it to take to double your money to determine the interest rate you’ll need to accomplish this.

Here are a few examples of the rule of 72 in action:

At 5% interest, your money will take 72 ÷ 5 or 14.4 years to double.

To double your money in 10 years, you need an interest rate of 72 ÷ 10 or 7.2%.

Let’s practice the rule of 72:

Rate of Return # of Years

The rule of 72 is a simplified formula and is intended to provide only an estimate, since it loses its

accuracy as the interest rate increases.