Will This Banking Quiz Earn Your Interest? Pt. 2

Answer: Truth in Lending Act

Before TILA (the Truth in Lending Act) was passed in 1968, banks and credit companies advertised low "interest rates" that didn't include fees, compounding, or service charges, making loans seem cheaper than they actually were. The APR was created to standardize the true cost of borrowing; it combined all those "hidden extras" into one clear annualized number. So, whereas the interest rate on a loan is just the charge on the money itself, the APR includes interest plus lender fees, so the APR is usually higher and thus makes for a better comparison for consumers to use. Two loans can have the same interest rate but have different APRs due to extra origination fees or mandatory charges, making it more expensive even despite that same nominal rate.

The CARD Act (Credit Card Accountability Responsibility and Disclosure Act) was passed in 2009.

The Equal Credit Opportunity Act (ECOA) was passed in 1974, and the Fair Debt Collection Practices Act (FDCPA) was passed in 1977, but neither of those two was focused on interest rates.

Answer: Discount rate loan

A discount rate is basically an interest rate used in reverse": since "interest" tells you how much money you'll have in the future if you invest today, the "discount rate" tells you how much future money is worth today.

Here's a practical way of looking at it.

Suppose you want to borrow $1,000 for one year. In a regular interest loan of let's say 10%, the bank gives you that $1,000 today, and in one year you have to pay it back at that 10% interest rate, so you pay them $1,100. That extra $100 you pay is the 10% interest on $1,000. So, you basically paid $100 for that loan, or in other words, the "effective cost" of the loan you got was $100 (10% of the $1,000).

Now, let's say you chose a discount rate loan from the bank instead, also at 10%.

This time the bank deducts the interest in advance, which means they only give you $900 (discounting that $100 you paid afterward in the regular interest situation). After one year you pay back only $1,000 instead of $1,100, right? In other words, instead of paying an extra $100 at the end of the loan period, they just take that $100 away at the beginning. But now let's take a look at what the "effective cost" was. You still paid $100 for the use of the loan, but in the discount rate situation you paid that $100 for the use of $900 instead of the $1,000 you got in the regular interest situation. So, what is the "effective cost" of that discount rate loan? Since you paid $100 for the use of $900, that's $100 ÷ $900, which comes to an 11.11% loan interest instead of 10%. Which means the discount loan at the same rate as a regular interest loan turns out to be more expensive.

Answer: Prime interest rate

The Policy rate, Base rate, Key interest rate and perhaps also in layman's terms, the Central rate to the interest rate set by a central bank (like the Federal Funds Rate in the United States or the Bank Rate in the United Kingdom) to influence the economy. It forms the foundation for other rates, such as mortgage or deposit rates.

Answer: The interest rate commercial banks charge their most creditworthy customers.

The Prime Rate is the interest rate commercial banks charge their most creditworthy corporate customers, which is usually the Central Bank Rate plus a fixed margin, which is often about 3%. It's usually a few percentage points above the central bank's policy rate. Other loans such as credit card loans or personal loans are often set at the Prime Rate + X%. The "X" is the bank's markup, which covers the cost of running branches, paying tellers, processing paperwork, etc., and also the risk involved on the chance you might not pay the money back.

Answer: False

Yes, a negative interest rate policy (NIRP) is a real thing. It's a strong push to get money flowing; if it costs you money to sit on your cash, you're more likely to spend it or invest it. For commercial banks it means that instead of a central bank paying them interest on their deposits, the central bank charges them a fee to hold their excess cash, meaning it is a penalty for hoarding money. It encourages banks to lend their money out to businesses and individuals rather than stowing it at the central bank, thus stimulating the economy and fighting deflation.

Answer: Interest

Surah Al-Baqarah (2:275), in the Quran states: "Allah has permitted trade and has forbidden interest". So, that doesn't just mean usury or excessive interest; Islamic finance forbids riba (interest) altogether, but it has clever alternatives. Islamic banks use profit-sharing (Mudarabah), leasing (Ijara), and Islamic Insurance (Takaful). The modern Islamic finance industry is now worth over $2 trillion worldwide.

Answer: Spot interest rate

The spot rate is the current market price for the immediate delivery of an asset, or the current interest rate applicable to a loan or deposit that begins immediately.

The other choices involve future expectations: The forward rate is the agreed-upon rate for a loan that begins in the future which is derived from the yield curve. The Expected future rate is what investors expect it will in the future often expected to be the same as the forward rate in markets. Expected interest rate is based on what investors hope to earn (based on forecasts), whereas the realized interest rate is the actual return after time passes and things like inflation, taxes, and market changes affected the transaction.

The Swap rate is the fixed rate agreed upon in exchange for receiving a variable interest rate from another party over a agreed upon period of time.

Answer: Yield

The Yield or Yield to Maturity (YTM) in bonds, is the internal rate of return on a bond if held to maturity; it includes both interest and capital gain/loss. It's the bond's total effective return-the "bottom line" for an investor who holds the bond until it matures.

Answer: Coupon rate

This fixed percentage is printed on the bond certificate; it multiplies the face value of the bond (also called the par), to determine the dollar interest paid periodically, usually twice a year, until maturity. So then, a $1,000 bond with a 5% coupon rate will pay $50 yearly (or $25 twice a year), no matter what the bond's current market price or yield is.

Answer: Prime bank note

In the 1980s and 90s, a notorious scam involved "Prime Bank Notes." The Scammers claimed that these were high-interest financial instruments issued by the top banks. But in reality, what is Prime Bank Notes do not exist. The term was used in these scams involving advance-fee frauds.

Risk-adjusted Interest Rate is a rate adjusted to include credit risk - the possibility that the borrower may default, so a higher risk means a higher interest rate.

The Inverted Yield Curve is when short-term rates exceed long-term ones.
Subprime refers to a category of borrowers with weak credit.