etant

4y

I just dont think theyd get the bond question, other then that it should be simple if you spend 2 min to think about it

HNDRXX

4y

· edited

Source: https://time.com/4403643/american-financial-literacy-test-fail/

The test: https://www.usfinancialcapability.org/quiz.php

Explanation to the questions by @etant
1\. Interest rate means they are going to pay you for the percentage of money you have deposited. So after second year you would have 102 in your account, so its def going to be more then 102 after 5 years.

2\. Inflation in this case means the percentage of everyday things that got more expensive over a time period (a 100$ in 1950s worth a lot more then today because of inflation). So if inflation is higher then interest rates then you would have less money then you've had.

3\. This is a tricky one, I wouldn't expect everyday people to get. Here is an example, you get price of bond of 100 dollars, rates at 1 percent per year, so you are suppose to get 1 dollar per year. If rates raise to 2 percent, in order for you to get the same amount of 1 dollar, the price of the bond need to drop to 50 . This is not how it actually works because you get paid back the original money you put in but yall get the idea. The markets need to make the same bond equally attractive.

4\. You have to pay back a sum of money in 15 or 30 years. There will be interest fee for each dollar you didn't pay back, so longer you wait to pay back the more interest. So even you pay more yearly with 15 years, you will pay less interest.

5\. Here they weren't clear about what is a mutual fund, but think of a fund like the S&P500 ( a basket of companies) so instead of betting on one company you are betting on a bunch of them. So you are betting on the fact that overall companies are going to do well, instead of betting on one. So in that sense it is safer, as you wouldn't know what is the next tesla or google.

6\. This is the most important concept of investing. Which is why you should invest early. Think about it for a min and refresh your 5th grade math. year 1: 100\*1.2 = 120 year 2: 120\*1.2 = 144 year 3: 144\*1.2 = 172.8 year 4: 172.8\*1\. = 207.36

It only took 4 years to double your money. If you were only earning 7% per year ( avg return of S&P500) it would take around 10 years to double your money. That's insane. Do you see the power of that, its called the power of compound interest, as Einstein said it " compound interest is the most powerful force in the universe"

etant

4y

the bond question? dw about that imo bond prices so low that normal investors shouldnt buy them

ASAKI

4y

this is dependent on the individual. age, goals, income, etc. are all important in determining whether or not one should invest into bonds. 100% equities sounds like a nice time until you hit the efficient frontier and that volatility catches up to you.

Danny

4y

When interest rises, bonds drop in price because of lower ROI if prices were to stay the same. The market corrects

JDC

4y

5/6, I rushed through it and my dumb ass got the bonds question wrong

Vincent Adultman

4y

4/6 but I took educated guesses.

Feel dumb as f*** thanks op

etant

4y

I just wrote a simple example, say you get price of bond of 100 dollars, rates at 1 percent per year, so you are suppose to get 1 dollar per year. If rates raise to 2 percent, in order for you to get the same amount of 1 dollar, the price of the bond need to drop to 50 . This is not how it actually works because you get paid back the orginal money you put in but yall get the idea.The markets need to make the same bond equally attractive

HNDRXX

4y

a 4 is a pass i think?

etant

4y

I mean sure bro, if you want to buy bonds at rates of less then 1 percent then be my guest. If I was 90 and about to die I wouldn't invest, if anything corporates rate bonds or emerging market bonds, sure af not US treasury, and bro you know being at the efficient frontier is good optimal right? and yea I mean if you were about to die you'd want less volatile portfolio