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1 SM3-1: Dollars and Sense Purpose: Practice what you have learned about the time value of money by calculating the responses for the following situations. Directions: After dividing into groups of four to five students, use a financial function calculator, a spreadsheet program with time-value-of-money functions, or financial function calculators on the Internet to solve the following time-value-of-money exercises. 1. Diane invests \$500 today in an account earning 7%. How much will it be worth in: 5 years? 10 years? 20 years? 2. Same facts as #1, except Diane finds an account earning 10%. How much will it be worth in: 5 years? 10 years? 20 years? 3. Elaine needs to save \$4,000 in four years. If she can set aside \$1,000 today, what rate of return does she need on her account? 4. Same facts as in #3, except now Elaine can also set aside \$50 per month. What rate of return does she need on her account? 5. Frank wants to buy a \$10,000 car. The car dealer offers him financing of 60 payments at 9% interest. What will his payments be assuming he pays \$0 down? 6. Same facts as #5, except the dealer also offers 48 payments at 8%. Now what will Frank s payments be assuming he pays \$0 down? 7. Gayle has a credit card with a \$500 balance on it and a 19% interest rate. If she wants to pay off her card in two years, what will her monthly payments be? How much interest will she pay? 8. Same facts as #7, except now the balance is \$2,500. What will Gayle s monthly payments be? How much interest will she pay? Name Date SM3-1: Dollars and Sense pg. 1 of 1

2 SM3-1: Dollars and Sense (Instructor) Purpose: Practice what you have learned about the time value of money by calculating the responses for the following situations. Directions: After dividing into groups of four to five students, use a financial function calculator, a spreadsheet program with time-value-of-money functions, or financial function calculators on the Internet to solve the following time-value-of-money exercises. 1. Diane invests \$500 today in an account earning 7%. How much will it be worth in: 5 years? \$ years? \$ years? \$1,935 2 Same facts as #1, except Diane finds an account earning 10%. How much will it be worth in: 5 years? \$ years? \$1, years? \$3, Elaine needs to save \$4,000 in four years. If she can set aside \$1,000 today, what rate of return does she need on her account? 41% 4. Same facts as in #3, except now Elaine can also set aside \$50 per month. What rate of return does she need on her account? 24% 5. Frank wants to buy a \$10,000 car. The car dealer offers him financing of 60 payments at 9% interest. What will his payments be assuming he pays \$0 down? \$ Same facts as #5, except the dealer also offers 48 payments at 8%. Now what will Frank s payments be assuming he pays \$0 down? \$ Gayle has a credit card with a \$500 balance on it and a 19% interest rate. If she wants to pay off her card in two years, what will her monthly payments be? \$25.20 How much interest will she pay? \$ (\$25.20 x 24 = \$604.80, less the \$500 original balance = \$104.80) 8. Same facts as #7, except now the balance is \$2,500. What will Gayle s monthly payments be? \$ How much interest will she pay? \$ (\$ x 24 = \$3,024.48, less the \$2,500 original balance = \$524.48) After students have completed the activity, lead a discussion with the following questions: 1. Did any of the answers to these problems surprise you? Which ones and why? 2. How does solving problems in a group differ from doing it on your own? 3. How would you feel about teaching someone else how to solve a time-value-of-money problem? SM3-1: Dollars and Sense (Instructor) pg. 1 of 1

3 SM3-2: Are You a Risk-Taker? Purpose: Assess your personal risk level by completing the questionnaire. Directions, Part I: Take the following quiz to find out if you are a conservative, average, or aggressive investor. Mark your choice in Column B. Column A Point(s) Column B Choice 1. When it comes to making the best choice, my luck has been: a. Rotten b. Average c. Better than average d. Terrific 2. Most of the good things that have happened to me have been because: a. I planned them b. I was able to exploit opportunities that arose c. I was in the right place at the right time d. Someone looks out for me 3. If a stock doubled in price five months after I bought it, I would: a. Sell all my stock b. Sell half my stock c. Sit tight d. Buy more shares 4. Making decisions about saving and investing on my own is something that I: a. Never do b. Occasionally do c. Often do d. Almost always do 5. If my boss were to tell me to do something at work that I know is a bad idea, I would: a. Say directly that it was a mistake b. Get co-workers to join me in opposing the idea c. Do nothing unless the boss brings it up again d. Do it anyway 6. For me to put 10% of all of my savings and belongings into a new venture that has a 75% chance of success, the potential profit would have to be at least: a. The same as the amount I had risked in investing in the venture b Three times the amount c. Five times the amount d. No amount would be worth the risk 7. When I see people involved in sports such as hang gliding or bungee jumping, I: a. Think they are idiots b. Admire them but would never participate c. Wish I could try such sports just once to see what they are like d. Think seriously about participating myself Name Date SM3-2: Are You a Risk-Taker? pg. 1 of 2

4 SM3-2: Are You a Risk-Taker? continued Column A Point(s) Column B Choice 8. If I held a finalist ticket in a lottery with a 1 in 5 chance of winning the \$50,000 prize, the smallest amount I would consider selling my ticket for before the lottery drawing would be: a. \$30,000 b. \$17,000 c. \$13,000 d. \$10, In the past, I have spent \$10 on one or more of the following activities: bet on my own recreational activities such as golf or poker, or bet on professional sports. (Choose the one that best applies.) a. I have done two or more of these in the past year b. I have done one of these in the past year c. I have done one of these a few times d. I have never done any of these 10. If I had to make a critical decision involving a large amount of money, I would probably do one or more of the following things: (Circle all that apply.) a. Delay the decision b. Have someone else make the decision for me c. Ask others to share in the decision d. Plan strategies that would minimize any loss Total Points Directions, Part II: For each question, write the points in Column A according to the following scales. For questions 1, 3, and 4: a. = 1 point b. = 2 points c. = 3 points d. = 4 points For questions 2, 6, 8, and 9: a. = 4 points b. = 3 points c. = 2 points d. = 1 point For questions 5 and 7: No matter what you chose, do not give yourself any points. Moral courage and physical bravery are not associated with your tolerance for investment risk. For question 10: Count up the number of items you circled. Subtract that number from 5, and this is the score you receive for this question. What your score means: 8 to 16 points Conservative investor; you are willing to take few risks 17 to 24 points Average investor; you are willing to take average risks 25 to 32 points Aggressive investor; you are willing to take greater-than-average risks Adapted and reprinted with permission from University of Idaho Extension SM3-2: Are You a Risk-Taker? pg. 2 of 2

5 Assessment 3-2: Evaluation Multiple Choice (10 pts.): Read each item carefully; then select the best answer. Each answer is worth 1 pt. 1. The Rule of 72 is useful in calculating the a. interest an investor needs to earn to reach a goal. b. age of money. c. time required to double an investment. d. fluctuations of the stock market. 2. The basic rule of a risk-to-return relationship is that the a. lower the risk, the higher the return rate. b. higher the risk, the higher the return rate. c. higher the risk, the lower the return rate. d. two are not related. 3. Which one of the following types of investments has the lowest risk and lowest rate of return? a. Savings bonds b. Stocks c. Collectibles d. Real estate 4. Which one of the following types of investments has the highest risk and the highest potential rate of return? a. Money market mutual fund b. Stocks c. Government bonds d. Savings bonds 5. Which statement below is true about mutual funds? a. All mutual funds buy stocks b. Mutual funds offer guaranteed returns c. Mutual funds are convenient and professionally managed d. You can choose which stock to include in your mutual funds 6. The time value of money can best be explained using which one of the following concepts? a. The pay yourself first philosophy b. The risk-to-return relationship c. The dynamics of compounding d. The Rule of What approximate interest rate would an investor need to earn in order to double the value of an investment in six years? a. 6% b. 10% c. 12% d. 72% 8. If an investor can earn 9 percent on an investment, approximately how long will it take to double in value? a. 72 months b. 8 years c. 9 years d. 12 years Score /50 Name Date SM3-3: Assessment 3-2 Evaluation pg. 1 of 4

6 9. In the future, a dollar will be worth a. Less than a dollar today b. More than a dollar today c. The same as a dollar today 10. Monica adds \$500 to her mutual fund every year for the next 10 years. Mason decides to wait 10 years when he knows he will have a lump sum of \$5,000 to invest in a mutual fund. If both Monica and Mason earn on average a 7 percent rate of return, who will have the larger mutual fund balance in 20 years? a. Monica b. Mason c. They will have the same balance amount because they each invested the same amount at the same rate d. There is not enough information presented to make a prediction Ranking (16 pts.) (Each question is worth 8 pts.): Use what you learned in this unit and consider current trends to rank the investment options listed below. 11. In the left column, rank the investments highest (#1) to lowest (#8) to show how they compare according to the opportunity for reward. Potential for Earnings on investment Highest Potential Reward = 1 Lowest Potential Reward = 8 Investment Option Preferred Stock Certificates of Deposit U.S. Savings Bonds Commodities Growth Stocks Insured Savings Account Money Market Account Balanced Mutual Funds 12. In the left column, rank the investments highest (#1) to lowest (#8) to compare the risk of the investments. Potential Uncertainty of Anticipated Return on Investment Highest Potential Reward = 1 Lowest Potential Reward = 8 Investment Option Preferred Stock Certificates of Deposit U.S. Savings Bonds Commodities Growth Stocks Insured Savings Account Money Market Account Balanced Mutual Funds SM3-3: Assessment 3-2 Evaluation pg. 2 of 4

7 Matching (5 pts.): Read each statement carefully. Select the term that best matches the statement by writing the letter of the matching term. 13. Used to determine how long it takes for your money to double 14. One type of income investment a. Compounding b. Diversification c. Interest d. Investments 15. The mathematical relationship between time, money, a rate of return, and earnings growth 16. The process of earning interest on interest 17. Spreading your money among different savings and investments e. Rate of Return f. Rule of 72 g. Savings Account h. Stock i. Time Value of Money Short Answer (4 pts.): Read each item carefully; then write an answer based on what you learned about saving and investing in Unit 2. Each question is worth 2 pts. 18. What is the difference between saving and investing? 19. Explain why investment experts recommend diversifying investments. SM3-3: Assessment 3-2 Evaluation pg. 3 of 4

8 Essay (15 pts.): 20. In this unit, you have considered ways to use investments to help you meet financial goals. Use what you have learned to outline your investment plan for the near future. a. State your top three choices of investment options you will use in the next 10 years. b. Summarize your plan for how much, how often, and when you will invest. c. Justify why you have selected each option and how the option relates to your financial goals. Investment A:. Investment B: Investment C: SM3-3: Assessment 3-2 Evaluation pg. 4 of 4

9 Assessment 3-2: Evaluation Answer Key Multiple Choice (10 pts.): Each answer is worth 1 pt. 1. c. time required to double an investment [Objective B, p. 32] 2. b. higher the risk, the higher the return rate [Objective D, p ] 3. a. Savings bonds [Objective D, p. 33] 4. b. Stocks [Objective D, p. 33] 5. c. Mutual funds are convenient and professionally managed [Objectives C, D; p. 37] 6. c. The dynamics of compounding [Objective B, p. 30] 7. c. 12% [Objective B, p. 32] 8. b. 8 years [Objective B, p. 32] 9. a. Less than a dollar today [Objective B, p. 30] 10. a. Monica [she started investing early and has the advantage of compounding interest] [Objective B, pp ] Ranking (16 pts.). Each question is worth 8 pts. 11. [Objectives C, D; pp ] Potential for Earnings on investment Highest Potential Reward = 1 Lowest Potential Reward = 8 3 or or 4 Investment Option Preferred Stock Certificates of Deposit U.S. Savings Bonds Commodities Growth Stocks Insured Savings Account Money Market Account Balanced Mutual Funds 12. [Objectives C, D; pp ] Potential Uncertainty of Anticipated Return on Investment Highest Potential Reward = 1 Lowest Potential Reward = Investment Option Preferred Stock Certificates of Deposit U.S. Savings Bonds Commodities Growth Stocks Insured Savings Account Money Market Account Balanced Mutual Funds SM3-3: Assessment 3-2 Evaluation (Instructor) pg. 1 of 2

10 Matching (5 pts.). 13. f. Rule of 72 [Objective B, p. 32] 14. g. Savings Account [Objectives A, C; p. 35] 15. i. Time Value of Money [Objective B, pp ] 16. a. Compounding [Objective B, pp ] 17. b. Diversification [Objective E, p. 38] Short Answer (4 pts.). Each question is worth 2 pts. 18. Award 1 pt. for an accurate explanation that savings is money set aside to be used for a future purpose, typically to be readily available to pay for a short-term goal. Award 1 pt. for an accurate explanation that investing is money used for the possibility of growing in value, typically to meet longer-term goals. [Objective A, p. 28] 19. Award up to 2 pts. for an accurate explanation that diversification reduces investment risk (1 pt.) by investing in several different types of investments (1 pt.). [Objective E, p. 38] Essay (15 pts.). 20. [Objectives A, C, D, E; pp ] Investment A: Award up to 3 pts. for listing a realistic investment strategy to include product name (1 pt.), amount (1 pt.), and plan for frequency/timing of investment (1 pt.) Award 1 pt. for realistic explanation of how the named investment product relates to the student s personal intermediate and/or longterm financial goals. Award 1 pt. if the student accurately identifies valid features of the investment product such as risk, reward, convenience that are relevant to the student s plan and goals Investment B: Investment C: SM3-3: Assessment 3-2 Evaluation (Instructor) pg. 2 of 2

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