Financial Literacy Quiz (May 2018)

This is a financial literacy quiz written by Richard Thripp in April 2018 and published on Tippyfi in May 2018. It covers interest rates, compounding, numeracy skills, stock investing, tax issues, healthcare, and retirement. After submitting, you will see how many points you scored, the answers you chose (marked with a red X if incorrect) and the correct answers (marked with a green checkmark) for all questions, and explanations for all questions.

1. Suppose you deposit \$1,000.00 in a savings account that earns interest, amounting to a 1.00% annual percentage yield (APY). This means that after each year passes, the account balance will be 101% of what it was a year before. After two years, what will your account balance be?

2. Suppose that when a person earns money, they pay 10% of their earnings as a tithe to their church. Pretend that other expenses and taxes (e.g., income, payroll, and sales taxes) are zero. For this person to be able to afford to purchase a \$100.00 item, how much money must they earn?

3. If five (5) people all have the winning number in a lottery and the prize is \$2,000,000.00 (two million dollars), how much will each of them get? Assume the prize is split evenly, taxes are zero, and that there is no penalty for a lump-sum payout. (Question adapted from the 2004 Health and Retirement Study)

4. Suppose that a credit card charges a 24% annual percentage rate (APR) on purchases, compounded daily from the date of purchase (365 days per year). This means that each day, the amount owed is 100.06575% of what was owed the previous day. One year after a purchase is made, how much of the original amount will be owed? Assume no payments are made toward this purchase and no penalties are assessed.

5. If inflation increases prices by 2.00% per year for a given item that costs \$100.00 now, how much will this item cost in 10 years?

6. You are shopping at a clothing store in a clearance section where all items are 50% off the marked prices. Items marked with a yellow tag receive an additional 30% off. Which method of computing the discounted price would result in a lower price for the customer?

7. Over a 30-year timeframe starting now, which of these is most likely to be the most profitable investment?

8. Avoiding income taxes is a reason to contribute to an individual retirement arrangement (IRA).

9. Monies contributed to individual retirement arrangements (IRAs), 401(k) accounts, and 403(b) accounts can be invested in certificates of deposits (CDs), money market accounts, and fixed-income assets (bonds), but cannot be invested in equities (stocks).

10. In a 10-year period, which of the following earnings scenarios will result in an unmarried individual paying less money in U.S. federal income taxes?

11. Given the performance of U.S. equities (stocks) in the past, if one invests in an index mutual fund of the whole U.S. stock market, the probability of making money in any particular one-year period is approximately what?

12. Given the performance of U.S. equities (stocks) in the past, if one invests in an index mutual fund of the whole U.S. stock market, as the number of years one stays invested increases (e.g., 10, 20, 30, 40 years, etc.), the probability of making money gets closer and closer to 100%.

13. If one has plenty of money saved, it is generally a good idea to purchase insurance that protects against minor expenses.

14. In most U.S. states, giving a person durable power of attorney means they can make medical decisions for you if you are incapacitated, even if their decisions are contrary to your family’s wishes.

15. Generally, designating someone as a payable-on-death beneficiary of a bank or investment account supersedes or bypasses beneficiaries named in a will.

16. A downside of health insurance is that hospitals typically negotiate higher rates with insurance companies than what they would bill an individual who did not have health insurance.

17. A disadvantage of accumulating an emergency fund is that you may become ineligible for means-tested benefits such as Supplemental Security Income (SSI).

18. Overall, the distributions of income and wealth in the United States have both been becoming more equitable since the 1970s.

19. On a dollar-for-dollar basis and without considering taxes, funds acquired through hard work and funds acquired via a windfall (e.g., winning the lottery) are of equal value.

20. Which of the following has a positive impact on your credit scores?