W!se Financial Literacy Practice Test Questions With Complete Answers, A+

Lamar believes that interest rates are going to fall in the near future and remain low for a considerable period of time. She should invest in: {Ans: C: A long-term, fixed rate certificate of deposit Reason : By investing now in a long-term, fixed rate certificate of deposit, she will lock in the higher current rate over a long period of time. If she waited until later to invest and interest rates had fallen, the certificate of deposit would have a lower interest rate. This is an example of interest rate risk.}Who benefits the most from inflation? {Ans: A: Long-term fixed rate borrowers Reason : Inflation reduces the purchasing power of money, so every dollar you spend in the future has less value than it has now. Since the payments on long-term fixed rate loans, like 30-year mortgages remain the same for the term of the loan, future payments will take place with dollars that have less purchasing power. Inflation also raises long-term interest rates, so if you are already locked into a fixed rate loan. your interest rate looks more and more favorable.}Which investment would you choose today if you believe interest rates will go up?