CAEC Financial Literacy and Personal Finance 5

Question 1

You deposit $1,000 in an account paying 5% interest compounded annually. How much is in the account after 2 years?

Accepted Answer

$1,102.50

Answer

$1,000 × 1.05 × 1.05 = $1,102.50, because the second year's interest is earned on the first year's interest too.

Question 2

Jordan's monthly debt payments total $900 and their gross monthly income is $3,600. What is their debt-to-income ratio?

Accepted Answer

25%

Answer

Debt-to-income ratio = $900 ÷ $3,600 = 0.25, or 25%.

Question 3

If a savings account earns 1% per year while inflation is 3% per year, what happens to the purchasing power of the savings?

Accepted Answer

It decreases by about 2% per year

Answer

The real return is roughly 1% − 3% = −2%, so the money buys less each year.

Question 4

What is the main purpose of diversifying an investment portfolio?

Accepted Answer

To reduce risk by spreading money across different investments

Answer

Diversification lowers risk because losses in one investment may be offset by gains in others.

Question 5

Financial advisors commonly recommend that an emergency fund cover about how much?

Accepted Answer

Three to six months of essential living expenses

Answer

Three to six months of essential expenses is the standard guideline for handling job loss or unexpected costs.

(CAEC) Canadian Adult Education Credential Practice Test