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Accumulated Interest: Part I. You have $100 in a savings account which earns 2% annual interest. After one year of accumulating interest, how much money is in the savings account?
Accumulated Interest: Part I. You have $100 in a savings account which earns 2% annual interest. After one year of accumulating interest, how much money is in the savings account?
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Answer: $102. As the savings account increases by 2% annually, 2% of $100 is $2. Added together, at the end of the year the balance of your savings account is $102.
Answer: $102. As the savings account increases by 2% annually, 2% of $100 is $2. Added together, at the end of the year the balance of your savings account is $102.
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Accumulated Interest: Part II. You have $100 in a savings account which earns 2% annual interest. After ten years of accumulating interest, how much money is in the savings account?
Accumulated Interest: Part II. You have $100 in a savings account which earns 2% annual interest. After ten years of accumulating interest, how much money is in the savings account?
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Answer: More than $120. When left untouched, your savings account grows each year. In the first year, it reaches $102, an increase of $2. However, it doesn’t just increase by $2 each year (if it did, then the answer would be $120). In fact, it grows by 2% of the total balance each year. Thus, while the rate remains unchanged, the dollar amount of increase rises year after year, from $2 to $2.04 to $2.08, etc. This is how interest accumulates, known as compounding. After ten years, the savings account will have $121.90.
Answer: More than $120. When left untouched, your savings account grows each year. In the first year, it reaches $102, an increase of $2. However, it doesn’t just increase by $2 each year (if it did, then the answer would be $120). In fact, it grows by 2% of the total balance each year. Thus, while the rate remains unchanged, the dollar amount of increase rises year after year, from $2 to $2.04 to $2.08, etc. This is how interest accumulates, known as compounding. After ten years, the savings account will have $121.90.
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Inflation: Part I. Your savings account, which earns 2% annually, grows gradually. However, inflation currently runs at 3%. After one year at the 3% inflation rate, is the money in your savings account able to buy more, less or the same as the day you deposited the money?
Inflation: Part I. Your savings account, which earns 2% annually, grows gradually. However, inflation currently runs at 3%. After one year at the 3% inflation rate, is the money in your savings account able to buy more, less or the same as the day you deposited the money?
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Answer: Less. As inflation (3%) is higher than your saving account’s annual interest rate (2%), your savings account will fall behind inflation during the sample year of the question. Thus, your money is worth less than when you deposited it.
Answer: Less. As inflation (3%) is higher than your saving account’s annual interest rate (2%), your savings account will fall behind inflation during the sample year of the question. Thus, your money is worth less than when you deposited it.
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Inflation: Part II. In a year when inflation rises at 2% and your paycheck rises by 3%, are you able to purchase more, less or the same amount of goods and services at the end of the year?
Inflation: Part II. In a year when inflation rises at 2% and your paycheck rises by 3%, are you able to purchase more, less or the same amount of goods and services at the end of the year?
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Answer: More. The price of goods and services rise at the rate of inflation (2% in this question). Thus, if your paycheck increases faster than inflation (3%), you will be making more than enough to make up for the increased price of goods and services.
Answer: More. The price of goods and services rise at the rate of inflation (2% in this question). Thus, if your paycheck increases faster than inflation (3%), you will be making more than enough to make up for the increased price of goods and services.
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Mortgages: Part I. You want to pay as little interest as possible on a home mortgage, regardless of the monthly payment. Do 30-year mortgages or 15-year mortgages have lower interest rates?
Mortgages: Part I. You want to pay as little interest as possible on a home mortgage, regardless of the monthly payment. Do 30-year mortgages or 15-year mortgages have lower interest rates?
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Answer: 15-year mortgages have lower interest rates. For paying off the mortgage quicker (15 years versus 30), the lender grants the homebuyer a lower mortgage rate. However, paying off the mortgage more quickly results in a higher mortgage payment as the amortization schedule is reduced by half. Thus, more of the payment goes toward paying off the mortgage principal and less toward paying interest.
Answer: 15-year mortgages have lower interest rates. For paying off the mortgage quicker (15 years versus 30), the lender grants the homebuyer a lower mortgage rate. However, paying off the mortgage more quickly results in a higher mortgage payment as the amortization schedule is reduced by half. Thus, more of the payment goes toward paying off the mortgage principal and less toward paying interest.
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Mortgages: Part II. How much down payment do you need to purchase a home without having to pay for mortgage insurance?
Mortgages: Part II. How much down payment do you need to purchase a home without having to pay for mortgage insurance?
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Answer: 20% of the purchase price. The minimum down payment needed to avoid mortgage insurance is 20% of the purchase price. Otherwise, you are required to purchase mortgage insurance to cover the increased risk of default. This is true for both Federal Housing Administration (FHA)-insured mortgages, known as mortgage insurance premiums (MIPS), and private mortgages, known as private mortgage insurance (PMI).
Answer: 20% of the purchase price. The minimum down payment needed to avoid mortgage insurance is 20% of the purchase price. Otherwise, you are required to purchase mortgage insurance to cover the increased risk of default. This is true for both Federal Housing Administration (FHA)-insured mortgages, known as mortgage insurance premiums (MIPS), and private mortgages, known as private mortgage insurance (PMI).
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Interest Rates: Part I. When the interest rate on a bond rises, what happens to the price of the bond?
Interest Rates: Part I. When the interest rate on a bond rises, what happens to the price of the bond?
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Answer: The price drops. Bond prices and interest rates have an inverse relationship; when one rises, the other falls, and vice-versa. That’s because with a higher interest rate, an investor can spend less money and still receive the same return. When a bond reaches maturity, it will be worth less than bonds purchased in a higher interest rate environment. Thus, the price decreases.
Answer: The price drops. Bond prices and interest rates have an inverse relationship; when one rises, the other falls, and vice-versa. That’s because with a higher interest rate, an investor can spend less money and still receive the same return. When a bond reaches maturity, it will be worth less than bonds purchased in a higher interest rate environment. Thus, the price decreases.
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You have $1,000 and want to use this cash to buy a bond. The annual interest rate on the bond is currently 3%. However, you hear on the news that interest rates are going to rise soon. Should you wait to buy the bond, or buy it before interest rates rise?
You have $1,000 and want to use this cash to buy a bond. The annual interest rate on the bond is currently 3%. However, you hear on the news that interest rates are going to rise soon. Should you wait to buy the bond, or buy it before interest rates rise?
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Answer: Wait to buy the bond. When interest rates rise, your cash will receive a higher return on investment. For example, at the 3% interest rate used in the example, you will receive a $30 return in one year. However, if interest rates rise to say 4%, your return will now be $40 a year, $10 more than if you had invested before the interest rate increased. 
You could go to Vegas, but investing in a bond results in some sort of guaranteed positive return, which is not always the case with gambling.
Answer: Wait to buy the bond. When interest rates rise, your cash will receive a higher return on investment. For example, at the 3% interest rate used in the example, you will receive a $30 return in one year. However, if interest rates rise to say 4%, your return will now be $40 a year, $10 more than if you had invested before the interest rate increased. You could go to Vegas, but investing in a bond results in some sort of guaranteed positive return, which is not always the case with gambling.
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