Question

Discuss the effects of compounding interest. Which institutions are competing for you as a customer to help structure your financial plan? What are you offering that you consider significant? Also discuss some of your ideas on risk when looking for higher interest rates. There are many banks, credit unions, savings and loans corporations and other financial institutions seeking your business, What are you going to demand as a consumer?

Answer 1

Compound interest is interest paid on the initial principal as well as the accumulated interest on money you have borrowed or invested. You will earn interest on the money you deposit, and on the interest you have already earned - so you earn interest on interest.

We can use this option only when we are not going to use the interest earned in the upcoming period. It is similar to investing in debt funds. This is used to earn income on idle amount which cannot be used used regularly.

Risks when interest rate is higher:

Normally the higher interest rate will be given when

• the risk of repayment is high,
• there is risk in the business,
• fixed-rate debt instrument will decline in value as a result of a rise in interest rates,
• there is the taxability risk,
• Inflatory risk,
• If there is liquidity risk

The consumer demands,

interest rates according to inflation rate & repayment capacity, Deposit insurance, Demand repayment.