Will This Banking Quiz Earn Your Interest?

Answer: $1102.50

The essential difference between a regular interest payment and a compound interest payout is that with a regular interest account you are making the same amount of interest every year (assuming you don't add to that initial principal deposit), but with a compound interest payment the calculation is based on that principal PLUS whatever interest you earned.

So, in this example your 5% earned you $50 in the regular interest account, giving you $1050 after one year and then another $50 after the second year, to bring your total to $1100. But in the compound interest account, your first year yielded $50 bringing you to $1050 after your first year of earning interest, and by the second year, your compound interest was calculated not at 5% of not just your principal ($1000), but instead was calculated at 5% of your principal PLUS your interest earned. So, 5% of $1050 is the calculation, bringing your account up to $1102.50. That's $2.50 more than the regular account. That may not seem like much, but over a long span of time, the compound interest phenomenon can turn small savings into large sums, but also small debts (as with credit cards) into nightmares. The saying goes: "Compound interest is the eighth wonder of the world. He who understands it, earns it: he who doesn't, pays it."

Before calculators, bank clerks used printed compound interest tables - reams of pages of precomputed figures, to calculate loan growth.

Answer: Bronze Age Mesopotamia

The earliest known record of interest comes from ancient Mesopotamia, during the Third Dynasty of Ur (c. 2112-2004 BC) and continued through the Babylonian and Assyrian periods. The earliest physical evidence from cuneiform tablets showed loan contracts from this time, with rates of about 20% per year for silver loans and 33⅓% per year for barley loans.

The Sumerian word for interest, was mas, which meant "calf", signifying the idea that money, could also reproduce.

Answer: Usury

In Medieval Christian Europe, the Hebrew Bible, and the Islamic Quran, charging interest at all was widely viewed as a sin. Ancient and medieval Hindu and Buddhist contexts also warned it was morally questionable. But the word usury stems from Catholic doctrine interpretations of the Bible and Aristotle, that charging any interest at all was "usura", and was to be condemned.

Lending money with interest only became widely accepted again during the Renaissance, when Italian bankers instituted the perspective that interest was the compensation for risk. Shakespeare's "The Merchant of Venice" (1596) dramatized the moral ambiguity surrounding lending with interest.

Answer: The Bank of England

As opposed to a commercial bank, a central bank is a country's main public financial institution managing that country's money, banking system, and economy. It is the only institution allowed to print or create that country's currency.
The Bank of England (1694) was founded to lend money to the government at interest, in order to fund its war against France. In return, the bank got the right to issue banknotes. Essentially, modern money was born out of a national loan in which the investors received 8% interest at that time.

Answer: The Banking Act of 1933 (Glass-Steagall Act), including Regulation Q

The Banking Act of 1933 (Glass-Steagall Act), which included Regulation Q, prohibited the payment of interest on checking accounts and capped interest rates on savings accounts. As a result, banks couldn't compete on price (interest rates), so they were all pretty much identical. So, they employed "non-price" methods, offering certain conveniences, services, and promotional giveaways like toasters, peaking from the 1950s through the 1970s, as the rate caps became more restrictive. With the Depository Institution Deregulation and Monetary Control Act in 1980, interest rate caps were phased out, prompting banks to compete directly with interest rates.

Answer: How many years it takes for money to double

The Rule of 72 is mental math shortcut in which you divide the number 72 by your annual interest rate to figure out about how many years it would take for your money to double. So, for example, if your interest rate was 6%, then 72 ÷ 6% equals 12 years. It proved surprisingly accurate dating back to its use by Renaissance merchants. It is noted that the rule is most accurate for interest rates between 6% and 10%. It gets less precise outside those boundaries.

Answer: The real interest rate

The nominal interest rate is the sticker rate you see advertised; the real rate subtracts inflation. So, a real interest rate is roughly the nominal rate minus inflation, so a 5% loan in 4% inflation is only about a 1% real return to the lender.

When inflation matches the nominal interest rate, the real rate is about zero: lenders get back money that buys roughly what it did at the start.

Answer: Effective interest rate

The effective interest rate (EIR) is the actual annual rate earned or paid after accounting for compounding (interest on interest) into consideration. It's also called the Annual Percentage Yield (APY) for deposits into accounts, or the Effective Annual Rate (EAR) for loans given. The formula is:
EIR=(1+i/n)^n −1
where i = nominal rate and n = the number of compounding periods per year.
So, for example: If the nominal rate (i) is 12% (or .12) and it is compounded monthly (which makes n = 12), then effective annual rate is 12.68%:
(1 + .12/12)^12 −1 = (1 + .01) to the 12th power -1 = 1.01 to the 12th power -1=
1.12682503013 - 1 = .12682503013, or 12.682503013% EIR

Answer: True

A fixed rate stays the same for the entire term of the loan, whereas a variable interest rate changes over time based on a benchmark, which is to say that it is linked to a public financial index (like EURIBOR, LIBOR, SOFR, primate rate, or a central bank rate).

This means that the fixed rate is predictable (principal and interest payments are known in advance), whereas the variable rate is unpredictable since payments can increase or decrease as those benchmark rates changes. Fixed rates are usually higher initially because the lender is taking on the risk of future interest rate changes, and is paying a premium for that certainty, peace of mind being protected from that risk.

Answer: The 1980s

To combat runaway inflation in the early 1980s, the Federal Reserve raised its key rate to a record 19-20%, pushing the average 30-year fixed mortgage rate to 18.44% in October 1981. It was Volcker's attempt to fight inflation by raising rates several times throughout 1980 and into 1981.

The effort did work as inflation fell to 3.7% by 1983 and remained lower for decades afterward. Even though it did cause unemployment to raise to 10.8% in 1982, that figure did also go down steadily after the initial "Volker Shock", falling 2.5% in just one year, then down to 7.2% in 1984, and then below 6% in 1987.