Financial Literacy Practice Problems

Here you will find a concise collection of basic financial literacy problems. Visit this page directly at hunkim.com/financial

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1. The simple interest formula is A=P(1+rt). If the annual interest rate is 10%, explain how a $1000 investment would grow over three years.
   
2. Explain the connection between the simple interest formula above and I=Prt, where I represents the interest generated.
   
3. The compound interest formula is A=P\left(1+\frac{r}{n} \right)^{nt}, where n represents the number of compounding periods. Suppose you borrow $400,000 for the bank for a mortgage. Calculate how much your debt grows to be if you decide not to pay in 10 years if the 3% annual mortgage rate is calculated:
   1. Annually
   2. Monthly
   3. Daily
   4. Every second
4. Choose the best option:
   • Pay $12,000 into your mortgage at the end of each year
   • Pay $1,000 each month into your mortgage
   • Pay $500 twice a month into your mortgage
5. Money grows exponentially and is a function of time. M(t)=5000(1.08)^x
   1. What is the principal amount?
   2. What is the annual growth rate?
   3. How much money will you have in 10 years?
   4. How many years until you become a millionaire?
   5. How can you become a millionaire more quickly?