Personal Finance 5.00 Saving and Investing

Compound interest is best defined as:

• interest earned on the principal

  investment.

• any form of interest earned from saving or investing.

• earning interest on interest

• the effect interest has on the total return on investment.

Which statement best reflects the philosophy of “pay yourself first”?

• An individual should save whatever money is left over after paying monthly bills.

• An individual should pay all fixed expenses before paying flexible expenses.

• An individual should set aside a predetermined amount of money for saving before using any of that money for spending.

• An individual should spend money on the items and activities enjoyed in life before paying any other expenses.

David's Personal Finance class has been discussing the importance of understanding liquidity and he is trying to explain the term to another student. Which statement is the most correct description of liquidity?

• How quickly and easily an asset can be converted into cash

• The amount of savings available

• A measurement of how much a person or household owns once all debts have been paid

• The amount of money needed to pay for the necessities and comforts currently enjoyed

Dylan is preparing a presentation about saving and the presentation rubric says that he must include an explanation of compounding interest. Which concept would be the best one to include in his presentation to show that he understands compounding interest?

• Interest earned on the principal investment

• Any form of interest earned from saving or investing

• Earning interest on interest

• The effect interest has on the total return on investment

When a goal has been set to save $100.00 a month for an emergency fund of $2,000.00, giving up food from the vending machine to achieve that goal is the:

• opportunity cost

• interest

• specific part of the SMART goal

• trade-off

When taking advantage of the time value of money, which is most likely to result in the largest return?

• Invest a large principal amount of money and then make no additional investments.

• Invest as long as possible and at the highest interest rate possible.

• Invest a small amount of money for a short period of time at the highest interest rate possible.

• Invest at a high interest rate because interest is the only factor that affects return.

Brett plans to save money toward purchasing a car. His coworker is telling him about a money market account he has that offers a tiered interest rate. What is Brett’s coworker talking about?

• The amount of money he earns depends on the balance, i.e. the higher the account balance the higher the interest rate he would earn.

• The amount of money he earns depends on the number of accounts he has at the depository institution, i.e. the more accounts he has, the higher interest rate he will earn.

• Brett’s coworker is talking about something that is illegal. A tiered account is promoted by scam artists who trick people into investing money in hopes of earning higher rates over time

• The rate of interest earned increases over time, i.e. leaving money in the account for 3 months would earn a lower interest rate than leaving money in the account for 12 months.

In relation to other options, how liquid is a savings account?

• More liquid than cash

• Less liquid than mutual funds

• More liquid than a certificate of deposit

• More liquid than a checking account

Linda needs a savings tool to help her manage her everyday purchases. The savings tool needs to be very liquid and accessible. Which savings tool should Linda choose?

• Certificate of deposit

• Checking account

• Money market deposit account

• Any of the above savings tools

Which correctly describes the security level of savings tools?

• Savings tools are not secure because they have a high risk of losing money.

• Savings tools are secure because they are protected by the U.S. government against loss.

• Savings tools are very secure because there are not risks involved with saving or investing.

• None of the above is true. It would be safer to keep the money at home in a shoe box.