5.01 / 5.02 Chapter Questions

Kylee’s Personal Finance class has been discussing the importance of understanding liquidity and she 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

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.

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.

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.

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

Which is a feature of a money market deposit account?

• No minimum balance requirements

• Unlimited transactions every month

• Tiered interest rates

• The money must remain in the account for a specific period of

  time

Which correctly describes the security level of savings tools?

• Which correctly describes the security level of savings tools?

• 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.

Which is a feature of a certificate of deposit (CD)?

• Funds deposited in a CD are held for a certain length of time.

• Funds deposited in a CD have tiered interest rates.

• Funds deposited in a CD are very liquid.

• Funds deposited in a CD can be accessed via check or debit

  card.

Hannah 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 Hannah choose?

• .Certificate of deposit

• Checking account

• Money market deposit account

• Any of the above savings tools