The big questions of financial education
Discover the most popular questions in financial education. They measure three important concepts: simple and compound interest, inflation, diversification. Test your knowledge!
Suppose on 1 January 2025 you have €100 in a deposit account and that the bank agrees to pay a guaranteed interest rate of 2 per cent per annum on the sums deposited. No other transactions are carried out on this account, either deposits or withdrawals.
At the end of the first year, after payment of interest and without taking into account any fees charged, how much will we have in the account?
Correct answer B. Exactly €102. Let's do the math. On 1 January 2025 you deposited €100 (capital) on which interest accrues during the year at a rate of 2 per cent on an annual basis.
| Date | Capital | Rate | Months | Interests | Amount available |
| 1 January 2025 | €100 | ||||
| 31 December 2025 | €100 | 2% | 12 | €2 | €102 |
Imagine now that you leave €100 in a current account that yields 2 per cent interest per annum and has no fees. After 5 years, how much do you imagine will be available?
Correct answer C. Over €102 . Let's do the maths. You deposited €100 (capital) on which interest accrues during the year at a rate of 2 per cent on an annual basis. After one year, the sum at your disposal is €102: €100 initial capital plus €2 interest (simple interest). From the second year on, the €2 interest is added to the capital.
| Date | Capital | Rate | Months | Interest | Amount available |
| 1 January 2025 | €100 | ||||
| 31 December 2025 | €100 | 2% | 12 | € 2 | € 102 |
| 1 January 2026 | €102 | 2% | 12 | € 2.04 | € 104.04 |
Suppose you leave €1,000 in a current account that yields 1 per cent interest and has no management fees. Then suppose that inflation is 2 per cent. Do you think that in a year's time, when you withdraw the money, you will be able to buy the same amount of goods that you could buy by spending the €1,000 today?
Correct answer B. No, I'll be able to buy a smaller quantity. The interest rate can't compensate for the loss of purchasing power caused by inflation.
Inflation occurs when there's a general increase in prices, which isn't limited to individual items of expenditure. When there's inflation, a unit of money (e.g. €1) makes it possible to buy a smaller quantity of goods and services; i.e. the real (effective) value of the unit of money is lower than in the past or, in other words, inflation reduces the purchasing power of money.Is the following statement true or false?
Buying a share in a single company usually provides a more secure return than buying into an equity mutual fund.
Correct answer B. False. In our example, if you invest your money in one company and it goes bankrupt, you can lose the whole amount: that is the specific risk associated with that company.
A mutual fund, managed by a professional, invests in many different companies: any losses for one company would be compensated by the positive returns of the other companies included in the fund. More generally, diversification means investing in a combination of financial instruments that are different in terms of type (such as stocks, bonds and real estate), duration (short, medium and long term) and investment markets (developed and emerging countries): the risk is not completely eliminated but, by spreading it across several fronts, the possibility of large losses is reduced.
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