Banking Flashcards
(28 cards)
What is the definition of interest rates?
The amount charged, expressed as a percentage of principal by a lender to a borrower for the use of assets
Assets may include cash, consumer goods, vehicles, or buildings.
What happens to interest rates when the borrower is considered low-risk?
They are usually charged a low interest rate.
What does APR stand for?
Annual Percentage Rate.
What does APR represent?
The annual rate charged for borrowing, expressed as a single percentage number that represents the actual yearly costs of funds over the term of a loan.
How can APR be broken down?
Monthly or daily.
What are the three main types of APR?
- Fixed
- Variable
- Tiered
What is the difference between APR and APY?
APY (Annual Percentage Yield) takes compound interest into account.
What is the role of the Federal Reserve regarding interest rates?
The Federal Reserve can influence interest rates by raising or lowering the discount rates and indirectly influencing the Federal Funds Rate.
What is the discount rate?
The interest rate banks are charged when they borrow funds overnight from the Federal Reserve.
What is the Federal Funds Rate?
The rate that banks charge each other for overnight loans.
What happens when the Fed lowers interest rates?
Capital is easier to acquire, promoting economic development.
What is the impact of raising interest rates on consumer spending?
Consumers will have less disposable income and may cut back on spending.
What is the Time Value of Money?
The idea that money available in the present is worth more than the same amount in the future due to its potential earning capacity.
What is Simple Interest?
Interest calculated only on the principal amount of the loan.
What is Compound Interest?
Interest calculated on the principal amount and also on the accumulated interest of previous periods.
What is the formula for calculating Simple Interest?
Simple Interest = Principal x Interest Rate x Term of the loan.
What is the formula for calculating Compound Interest?
Compound Interest = P[(1 + r/n)^nt].
What does the Rule of 72 state?
To find the number of years required to double your money at a given interest rate, divide the compound return into 72.
What is the average savings rate in the U.S. according to the Bureau of Labor Statistics?
3% of disposable income.
Fill in the blank: Consumption = _______ + savings.
Disposable income.
What are the four kinds of financial institutions?
- Commercial Banks
- Savings and Loan Associations
- Credit Unions
- Brokerage Firms
What is the primary service of Commercial Banks?
They take deposits for checking and savings accounts and grant credit.
What is the purpose of Automated Teller Machines (ATMs)?
To provide easy access to money from multiple locations, 24 hours a day.
What is the function of Direct Deposits and Automatic Withdrawals?
To enable account holders to deposit money or pay bills automatically.
