Question

1. Which option is an investment with compound interest?(1 point)

A. a rental property

B. a checking account

C. a mutual fund following the S&P 500

D. a savings account


2. Which of these is considered a financial market?(1 point)

A. Sotheby’s auction

B. New York Stock Exchange

C. J.P. Morgan Chase

D. Ferrari dealership


3. Which of the following is not a characteristic of a typical bank savings account?(1 point)

A. no restrictions on money withdrawals or deposits

B. savings are easily accessible for the customer

C. a high interest rate

D. an average of 0.05% interest with no other restrictions


4. Which of the following are considered to be capital gains?(1 point)

A. the new value of a stock after the market closes

B. the profit earned on the sale of an asset which has increased while it was owned

C. the money lost when a stock is sold for less than it was purchased for

D. the interest earned from a government bond

Answer 1

Over time, stocks offer a higher average return compared to bonds and savings accounts due to their potential for significant growth. High-risk investments typically have the potential for higher returns, not necessarily low. Interest calculations for loans depend on the principal, rate, and time, with a simple formula to determine the total interest accrued.

Step-by-step explanation:

Understanding Investment Returns

When analyzing the average return over time among stocks, bonds, and savings accounts, stocks typically have a higher average return. This is due to stocks having the potential for substantial growth, though they also come with higher volatility. For instance, the S&P 500 saw a 26% increase in 2009 after a 37% decline in 2008. Bonds experience fluctuations too, but these are usually less extreme than stocks and are often influenced by interest rates. On the other hand, savings accounts tend to change very little in value over time, resulting in lower returns compared to stocks and bonds.

Investment risk and return are related, but a high-risk investment does not inherently mean low returns. In fact, high-risk investments often offer the potential for higher returns as a reward for the increased risk taken by the investor.

To calculate simple interest on a loan, the formula is interest = principal x rate x time. For example, a $5,000 loan with a 6% interest rate over three years would accrue a total of <$strong>900 in interest ($5,000 x 0.06 x 3).

If $500 in simple interest was earned on a $10,000 loan over five years, the annual interest rate charged would be 1% ($500 / $10,000 / 5).