A photo of students in suits sitting at desks taking an exam in an open room with tall chairs. … [+]
Universities have changed over the past few decades, and that should be obvious to even the casual observer.
However, recent research papers have shown that the majority of students still do not understand basic financial issues. Financial literacy and student loans: A survey of college students, The study, written by Hipolito Davila and Jitka Hilliard of the finance department at Auburn University in Alabama, found that students in the study performed significantly worse overall on a six-question financial literacy test.
The students' test results were disappointing, to say the least: Fewer than three in 20 (14.5%) got all six questions right, and fewer than half (46.2%) got four questions right, the study revealed.
The data came from a survey of 31,000 full-time students, mostly undergraduates, at a major public university in the southeastern United States.
To make matters worse, those who needed financial knowledge the most performed even worse than those with no student loans: Those with no student loans got an average of just 3.1 questions right, while those with loans got an average of just 2.6 questions right, the study found.
Perhaps even worse is the lack of know-how of business majors, who got an average of 3.0 questions right, or half the questions right. Non-business majors fared even worse, getting 2.2 questions right. And the results show it.
The only good news here is that over a decade ago, in 2013, 3,357 Federal Reserve employees took a similar test that had only five questions. Only a third of Federal Reserve employees got all five right — not a great number for a bank that's supposed to be a powerhouse with some of the best economists around, but a lot better than the general population.
The title of the research paper is Employee financial literacy and retirement planning behavior: A case study. You can read it here. Written by Robert Clark, Annamaria Lusardi, and Olivia S. Mitchell.
For those with an interest in finance or business, these questions may seem relatively straightforward. Below are some examples of questions students have faced, taken directly from research papers. (See bottom of page for answers.)
Risk and Diversification
Buying shares in a single company usually offers a safer return than an equity mutual fund.
- true
- b. Error
- c. I don't know
- D. I don't want to say it.
Bond Prices
When interest rates rise, what typically happens to bond prices?
- a. They stand up
- b. They will fall
- c. Remains the same
- d. There is no relationship between
- Bond Prices and Interest Rates
- e. I don't know
- f. I don't want to say it
Compound Interest
Suppose you owe $1,000 and the interest you are charged is 20% per year, compounded annually. If you pay nothing back at this interest rate, how many years will it take for the amount of your debt to double?
- Less than 2 years
- b. 2 years or more but less than 5 years
- c. 5 years or more but less than 10 years
- d. At least 10 years
- e. I don't know
- f. I don't want to say it
mortgage
A 15-year mortgage typically has higher monthly payments than a 30-year mortgage, but you’ll pay less total interest over the life of the loan.
- true
- b. Error
- c. I don't know
- D. I don't want to say it.
Answer.
1. Bond prices will fall 22 years or more but less than 5 years 3. Sure, you'll pay less total interest on a 15-year loan.
