Intro to Money and It's Cost

To determine the time value of depositing $100 in a savings account, a person needs to know the interest rate and

• her total income.

• the rate of inflation.

• whether the account is FDIC protected.

• whether the bank offers overdraft protection.

Answer explanation

The rate of inflation is crucial for understanding the real value of money over time. It affects how much purchasing power the $100 will have in the future, making it essential for determining the time value of the deposit.

Lamar believes that interest rates are going to fall in the near future and remain low for a considerable period of time. She should invest in:

• Nothing, she should put her money under her mattress

• A variable rate certificate of deposit

• A long-term, fixed rate certificate of deposit

• A short-term, fixed rate certificate of deposit

Answer explanation

Lamar expects interest rates to fall, making a long-term, fixed rate certificate of deposit ideal. It locks in higher rates now, ensuring better returns compared to variable or short-term options.

If a person has $1,000 in a savings account and earns $20 a year in interest on that account, the rate of return on the money is close to

• 5%.

• 2%.

• 10%.

• 20%.

Answer explanation

To find the rate of return, divide the interest earned ($20) by the principal ($1,000). This gives 20/1000 = 0.02, or 2%. Therefore, the correct answer is 2%.

The time value of money refers to the concept that money:

• Received today is worth more than the same amount of money received in the future

• Changes in value along with interest rates

• Money will double in value over seven years

• Is the foundation for developing a financial plan

Answer explanation

The time value of money emphasizes that money received today can earn interest, making it more valuable than the same amount received in the future. This principle underlies many financial decisions.

The cost to use someone else's money for a period of time is called the:

• Interest rate expressed as a percentage

• Opportunity cost

• Minimum payment

• Inflation rate

Answer explanation

The cost of using someone else's money is known as the interest rate, which is typically expressed as a percentage. This reflects the fee charged for borrowing funds over a specific period.

What should a person do when he believes he is being charged too high a rate of interest for a loan by a lending institution?

• Accept the loan but pay it off early.

• Ask the lending institution to lower its rates.

• Notify the lending institution about state usury laws.

• Notify the local Better Business Bureau.

Answer explanation

Notifying the lending institution about state usury laws is the best action, as it addresses potential illegal interest rates directly. Other options may not effectively resolve the issue of high interest.

The information that a lender must disclose to consumers applying for a cash loan is:

• The formula for compounded interest

• The annual percentage rate (APR), and/or the finance charge

• Full dollar amount being paid back on the loan over its life

• The tax obligations

Answer explanation

The correct choice is the annual percentage rate (APR) and/or the finance charge, as lenders are required to disclose these key terms to help consumers understand the cost of the loan.

Interest earned on interest is known as:

• Simple interest

• True interest

• Compounded interest

• Variable interest

Answer explanation

Compounded interest refers to interest earned on both the initial principal and the accumulated interest from previous periods, making it the correct choice for interest earned on interest.

Who benefits the most from inflation?

• Long-term fixed rate borrowers

• Lenders

• Persons on fixed incomes

• The government

Answer explanation

Long-term fixed rate borrowers benefit from inflation because they repay their loans with money that is worth less over time, effectively reducing the real cost of their debt.

Which investment would you choose today if you believe interest rates will go up?

• Long-term bonds

• Variable-rate loans

• Short-term savings instruments

• Stocks

Answer explanation

If you believe interest rates will rise, short-term savings instruments are preferable as they can be reinvested at higher rates sooner, unlike long-term bonds which lock in lower rates.