Quiz · Medium
Compound interest, APR vs APY, the rule of 72, present value, credit scores, retirement accounts and investing basics, with worked math for every calculation.
You carry a $2,000 credit card balance at 24% APR. About how much interest is charged in one month?
$480
$24
$48
$40
Monthly rate = 24% ÷ 12 = 2%, and 2% × $2,000 = $40. Over a year that is about $480, which is why paying only the minimum is so expensive.
You invest $1,000 at 5% interest compounded annually. How much do you have after 2 years?
$1,100.00
$1,102.50
$1,105.00
$1,050.00
. The extra $2.50 over simple interest is interest earned on the first year's interest.
You invest $1,000 at 5% SIMPLE interest for 2 years. How much do you have at the end?
$1,102.50
$1,050.00
$1,100.00
$1,010.00
. Simple interest is only ever calculated on the original principal.
You deposit $1,000 at 12% annual interest compounded monthly. What is the balance after 1 year?
$1,120.00
$1,126.83
$1,144.00
$1,012.00
. More frequent compounding earns slightly more than $1,120.
A credit card advertises a 12% APR, compounded monthly. What is the effective annual rate (APY) you actually pay?
12.00%
1.00%
12.68%
13.50%
. APR ignores compounding; APY includes it. That is why banks advertise APY on savings and APR on loans.
Using the rule of 72, about how long does it take money to double at 8% annual return?
6 years
8 years
12 years
9 years
Years to double ≈ 72 ÷ interest rate = 72 ÷ 8 = 9 years. It is a mental-math shortcut that works best for rates between about 6% and 10%.
You will receive $1,100 one year from now. At a 10% discount rate, what is it worth today?
$990
$1,210
$1,100
$1,000
. Money today is worth more than the same amount later because it can earn interest.
You invest $1,000 at 5% compounded continuously for 10 years. About how much will you have?
$1,500.00
$1,628.89
$1,648.72
$1,700.00
. Annual compounding gives , slightly less.
You have a $3,000 balance on cards with a total limit of $10,000. What is your credit utilization?
3%
30%
33%
70%
Utilization = balance ÷ limit = 3,000 / 10,000 = 30%. Keeping it under about 30%, and lower still if possible, helps your credit score.
Which factor has the BIGGEST weight in a FICO credit score?
Payment history
Length of credit history
New credit inquiries
Credit mix
Payment history is about 35% of a FICO score, followed by amounts owed (about 30%). A single late payment can hurt more than a hard inquiry.
What is the key tax difference between a Roth IRA and a traditional IRA?
Roth contributions are tax-deductible now; withdrawals are taxed later
Roth contributions are made with after-tax money; qualified withdrawals in retirement are tax-free
Neither account has any tax benefit
Roth IRAs are only for employees of large companies
Roth = pay tax now, not later. Traditional = possible deduction now, tax on withdrawals later. A deduction now with taxed withdrawals later describes the traditional IRA.
You earn $50,000 and contribute 6% to your 401(k). Your employer matches 50% of your contributions up to 6% of salary. How much does your employer add per year?
$3,000
$6,000
$1,500
$1,000
Your contribution = 6% × $50,000 = $3,000. The match = 50% × $3,000 = $1,500. Contributing at least enough to get the full match is free money.
Interest rates in the economy rise. What happens to the price of a bond you already own that pays a fixed coupon?
It falls
It rises
It stays the same until maturity
It doubles
New bonds now pay more, so your lower-coupon bond is less attractive and its market price falls. Bond prices and interest rates move in opposite directions.
Owning an index fund of 500 companies instead of one company's stock mainly reduces:
Company-specific (unsystematic) risk
Market-wide (systematic) risk
Inflation
All investment risk
Diversification cancels out risks unique to individual companies. It cannot remove systematic risk, such as a recession that hits the whole market.
Using the 50/30/20 budget rule, how much of a $4,000 monthly take-home pay should go to savings and debt repayment?
$1,200
$2,000
$400
$800
50% needs ($2,000), 30% wants ($1,200), 20% savings and extra debt payments: 0.20 × $4,000 = $800.
