Topic: Compounding Interest and the Banker
Many factors are influencing the cost of money for both individuals and corporations. In some cases, cash flows are received in advance, and in other cases, cash flows are received at the end of a period. In still other cases, cash flows have been received either quarterly, semi-annually, or yearly. How often do interest compounds also have an effect on the cost of money? Find out what your bank is currently paying in interest on a savings account, and when they pay this interest. Report how your bank collects interest on their consumer loans.
Explain how the way they collect and pay interest has an effect on interest compounding and on the cost of capital. APA formatting, (300 – 350) words.
Compound Interest and the Banker
Compound interest can be defined as the amount that is paid by the bank on the balance amount of the customer. In other words, it can also be called interest. The extent to which the money would multiply in the account depends on the rate of interest, the balance in the account, and the frequency of compounding by the bank.
Under compound interest, the interest is paid on the principal, and interest is earned on interest also. Most banks pay compound interest on fixed deposits, but getting a good rate is essential.
The rate of interest that is offered on the savings account by my bank is 3.5% for the minimum balance in the savings account. Though the interest is calculated on an everyday basis, the payment is made to the customer account only on a quarterly basis.
Consumer loans are loans offered by the bank to individuals for buying household goods and also devices that would be for personal purposes. Some products purchased with a consumer loan are ACs, refrigerators, mobile phones, television sets, cameras, and many more. The interest rate on the consumer loan would start from 0% to 18% depending on the offer provided by the bank. The bank uses the reducing balance method to calculate the interest wherein the interest is calculated only on the outstanding amount and not on the entire loan amount which helps the customers to save a lot on their interest. The minimum loan amount would start from 10,000 and the maximum amount would be 500,000 for buying consumer products. The loan can be settled depending on the convenience of the customer starting from 3 months to 36 months.
The cost of funds can be defined as the interest banks and other financial institutions bear for the capital used in their operations. The difference between the cost of funds and the interest charged to the consumers is the profit made by the bank. The cost of funds for the bank depends on the interest paid by the bank to its customers on various accounts like fixed deposits, savings accounts, etc. Ultimately, the interest charged on various loans must be more than the interest born to obtain the required capital (Wynn, 2019).
Wynn, K. (2019). The Banker and the Little Blue Books: Marcet Haldeman-Julius’ Intertwined Roles in Publishing and Finance. The Midwest Quarterly, 61(1), 31-8.