​Kembara’s Financial Solutions - The Effective Annual Rate is Calculated
As shown in the prior case, the annual quoted percentage on borrowing can differ significantly from the actual annual rate of borrowing. The following formula can be used to determine the effective yearly rate from the annual quoted percentage:

Referring back to the loan from ABC Bank with quarterly interest payments based on a stated rate of 10% pa

Step 1: Determine the interest rate that will be applied for each time period that the loan specifies. Since the loan has quarterly interest payments, the quarterly interest rate is equal to the annual rate of 10% divided by 4. (because there are four quarters in each year). Interest is levied quarterly at a rate of 10% divided by 4, or 2.5 percent.

Step 2: Using the rate determined in Step 1 and assuming no interest is paid during the year, determine how much will be owing at the end of the year given a loan of £100 at the start of the year. At the start of the year, the loan's starting balance was £100. 100 multiplied by 2.5% to equal £2.50 in interest at the conclusion of the first quarter. Assuming no interest has been paid, the loan's starting balance at the beginning of the second quarter is £102.50 ($100 + £2.50). At the end of the second quarter, interest was levied at the rate of £2.56 per £102.50. (rounded to the nearest penny). Assuming no interest has been paid, the loan's starting balance at the beginning of the third quarter is £105.06, or £102.50 plus £2.56. By multiplying £105.06 by 2.5% at the conclusion of the third quarter, interest came to £2.63. (rounded to the nearest penny). Assuming no interest has been paid, the loan's starting balance at the beginning of the fourth quarter is £105.06 plus £2.63, or £107.69. By multiplying £107.69 by 2.5% at the conclusion of the fourth quarter, interest came to £2.69. (rounded to the nearest penny). If no interest has been paid, the loan balance at the end of the year will be £107.69 plus £2.69, which equals £110.38.

Step 3: Determine the annual effective interest rate using the loan's final balance from Step 2's calculation. Starting balance less ending balance is £100.38 - £100.00, or the annual effective interest rate, which is $10.38.

Step 4: Calculate the effective annual rate by converting the effective interest charged to a percentage of the initial sum. Effective interest is calculated as £10.38 divided by £100.00, or 0.1038. For a percentage, multiply by 100: 0.1038 x 100 = 10.38%.

IMPORTANT: UK sterling (pounds or $) is divided into 100 pence, or one penny, which is denoted by the letter "p." 100 cents, also represented by the letters "c" or "," are equal to one US dollar ($).

Exercise 2: Effective Annual Rate Calculation Example
An alternative method for figuring up the effective yearly rate is: 
Step 1: Determine the interest rate that will be applied for each time period that the loan specifies. This is a quarterly charge of 10% p.a. The rate is 10/4, or 2.5%, each quarter because there are four quarters in a year.

Step 2: Divide the rate from Step 1 by 100 to express it as a decimal. 2.5/100 is 0.025.

Step 3: Multiply the result from Step 2 by the number of times interest will be paid over the course of the year, then add the number 1 to the result. 1 + 0.025 = 1.025.
Given that interest is calculated quarterly, 1.025 multiplied by itself four times results in 1.1038. Note: Another way to write 1.025 x 1.025 x 1.025 is (1.025 'to the power of 4').

Step 4: Subtract 1 from the result of Step 3 and multiply the result by 100 to express the result as a percentage.
1.1038 – 1 = 0.1038 0.1038 x 100 = 10.38%.

​Kembara’s Financial Solutions - Rates of Interest
It's common for lenders to tack on interest when extending credit. A bank, credit card firm, or even a payday loan provider could be the lender. The manner the interest rate is disclosed may be rather deceptive. Here are a few fictitious instances: Example Tom is searching for a loan to purchase a new laptop and has discovered four different options:
1. The personal loan offered by ABC Bank will include quarterly interest payments and a 10% annual interest rate.
2. XYZ Bank is providing a loan with a 10% annual interest rate that will be added to the debt each month.
3. The monthly interest rate for the MISA credit card is 1%.
4. The Payday Loan Company will tack on 0.8% daily interest. Which source of funding is the least expensive for Tom?

The credit card and payday loan lower rates could initially appear more affordable than the 10% quotes from the banks. Even though the payday loan is only quoted at 0.8%, it is very obvious that it is the most expensive because the percentage is a daily rate. It is immediately calculated to be closer to 292% pa (as there are 365 days most years). The MISA credit card appears pricey when compared to the two banks, though not quite as unreasonably so. Since there are 12 months in a year and the banks are both claiming 10%, a monthly fee of 1% can be looked of as around 12% annually. Tom now has to decide between ABC and XYZ, both of which are quoting 10%. However, there is a clear winner in this scenario: ABC bank is less expensive because it adds interest quarterly while XYZ does so monthly. This indicates that the loan balance rises each month at XYZ bank but just once every three months at ABC bank. At XYZ bank, interest is essentially being charged more frequently on interest because interest is charged on the unpaid debt. If Tom takes out a $1,000 loan, the progression of the loan balance in the two banks throughout the first six months is depicted below.

Bank ABC
The yearly interest rate of 10% divided by the year's four quarters yields a quarterly interest rate of 2.5%, which is added to the loan.

Bank XYZ
The yearly interest rate of 10% divided by the year's 12 months results in a monthly interest rate of 0.833%, which is added to the loan.

Therefore, it is evident from the foregoing that ABC bank is less expensive after six months, with a loan balance of $1,050.625 as opposed to the higher loan level of $1,051.03 at XYZ. Because ABC charges interest less frequently (quarterly as opposed to XYZ's monthly), this is the case.

The aforementioned illustration demonstrates how the disclosure of interest may be deceptive if caution is not taken to ensure that all relevant factors are taken into account. Actually, regulatory agencies also assist by mandating that lenders provide rate quotes based on comparable criteria. In most cases, the quoted rate must be made yearly available, and some sort of effective annual rate must also be revealed. The advertised rate is changed to reflect the frequency of interest charges to arrive at the effective annual rate. The stated rate and the actual annual rate are same when interest is charged on a yearly basis. When interest is accrued on a quarterly or monthly basis rather than annually, the effective annual rate will be higher than the rate stated.

​Kembara’s Financial Solutions – Pawnbrokers and Payday Loans 
There are alternative options available in the shape of pawnbrokers and payday loans for people who are relatively anxious to obtain money — frequently where the banks and credit card providers have already surpassed the maximum lending available. Something of value that gives the pawnbroker some security is needed in order to get a loan from them. This could be a wedding band or another priceless item of jewelry, such a timepiece. A valuable item (either real, sentimental, or both) that the pawnbroker may keep and store until the loan is repaid must serve as the security. Typically, the pawnbroker decides on the loan right away. Generally speaking, borrowing money from a pawnbroker carries a substantially higher interest rate than borrowing money from a bank or using a credit card.

Payday loans are advertised as loans that give borrowers access to cash before their next paycheck from their work. Although they are a very pricey kind of borrowing, the offer is fairly straightforward, as demonstrated in the example below. Example Mr. Short is given the opportunity to "borrow up to £1,000 instantly" by a payday loan operator. The lender will make a decision right away, which is good news, but the loan will cost you '£16.80 per £100,' which is bad news. In accordance with the agreements, reimbursement is due three weeks from now on Mr. Short's next pay day. Therefore, the cost of borrowing is 16.8% for just 21 days, or about 292% annually! In certain nations, like the UK, the regulator has put a cap on the rate of interest that can be charged due to public uproar over the high rates of interest charged. Payday lenders in the UK are now only permitted to charge 0.8% per day as of January 2015.

In conclusion, loans from pawnbrokers and payday loans are: • readily available — decisions are frequently made right away; • very expensive compared to other borrowing options; • for pawned items, repayment is necessary to reclaim ownership from the pawnbroker; • for payday loans, loans are very short-term, with repayment due at the following payday.

​Kembara’s Financial Solutions-Credit Cards 
Credit cards frequently offer lending options that are even more versatile than an overdraft. Banks, specialized companies like Visa and MasterCard, supermarkets, football teams, and charitable organizations all offer credit cards. When someone applies for a credit card, if they are approved, they are given one with a specific borrowing limit (the credit limit). After that, they can use the card to make purchases, and the amount borrowed will rise with each one. The borrowed funds must be repaid in full at least monthly. It is a good idea to pay off all of the borrowed money each month in order to avoid paying interest, which is typically imposed on unpaid debt at a rate of roughly 20% per year. Consequently, credit cards frequently contain the following features: • adaptable, allowing use up to the credit limit; and at a variable interest rate, which is typically expensive • Monthly payments of a minimum amount are necessary.

​Kembara’s Financial Solutions - Focus on Retail Borrowing
What kind of borrowing is offered to retail customers, and how: loans, mortgage loans, and overdrafts are available from banks.

Borrowing allows people to spend more money than they have on occasion because they want to or need to. Since they frequently put their money in retail bank accounts, the bank is frequently their first stop when they need to borrow money.

Mortgages, loans, and overdrafts
The three most popular borrowing options offered by banks to retail consumers are loans, mortgages, and overdrafts. The examples that follow show each of these.
Example Dot, Jade, and Anna are three recent college grads who have started full-time jobs. Dot decides she needs to get a car because her employment is some distance from her house and public transportation is not excellent. She discovers the perfect car, a used Volkswagen Polo that will run her about $6,000. Dot requests a $6,000 loan from her bank because she doesn't have much saved up. The loan has a three-year repayment term with monthly payments and an 8% annual percentage rate of interest. In the aforementioned illustration, Dot obtained financing from a bank to buy the car.

 Bank loans can be obtained for any purpose; a car is not a requirement. However, the typical characteristics of a bank loan are that it is typically: • for a fixed term that is typically less than five years (in the example above, it is three years); • at a fixed rate of interest (8% in the example above); • with a defined repayment schedule (monthly in the above example). Another name for Dot's loan is an unsecured loan. This is due to the fact that the bank does not demand that any security, such as the car, be given to it while the loan is still open.

Example
Jade is blessed to have wealthy parents who have supported her efforts to purchase a home of her own. Jade has located the perfect property, but it will cost her $250,000 to buy it. Her parents have agreed to pay her $50,000, and she takes out a mortgage loan from the bank to borrow the remaining amount. The agreement stipulates that Jade will pay back the loan in equal monthly installments over a 25-year period at the bank's standard variable rate (currently 6%, but subject to change). If Jade defaults on the loan, the bank has the right to seize Jade's property in order to collect the outstanding debt. The mortgage loan in the aforementioned illustration is referred to simply as a mortgage. Mortgage loans are almost commonly obtained to purchase real estate, and because they frequently involve large sums of money, they are typically repaid over longer periods of time than other types of loans. The bank that lends the money typically charges a variable interest rate that can go up or down to keep in step with market interest rates because the money will be returned over such a long period of time. Furthermore, the mortgage loan has the added security feature of being secured on the property for the bank, unlike the majority of other types of loans. The bank may seize property to cover the loan balance if the borrower doesn't make the required payments. Other loans are referred to as unsecured since they typically lack the same feature. In conclusion, mortgages typically: • have a predetermined term (25 years in the example above); • have a variable interest rate (the bank's "standard variable rate" in the example above); • have a predetermined repayment schedule (monthly in the example above); and • are secured by the property for which the loan is being used.

Example
Anna makes a fluctuating living as a writer. She makes a lot of money in some months, but her revenue drops throughout the summer since she would rather travel than write. Anna enjoys eating and looks forward to dining out frequently. She enjoys eating out so much that in some months, the habit actually causes her to lose more money than she makes. Anna has a deal with her bank that allows her to spend up to $1,000 more than she has in her account due to her changeable income, usually during the lean summer months. Apparently, this is an overdraft facility. The bank may withdraw this facility at any time, but there is no defined deadline or timeline for repayment. During the busy winter months, it is anticipated that Anna will be able to pay off the overdraft. The bank will impose an overdraft fee on Anna that is now 10% per annum, but this rate is subject to change at any moment with at least 14 days' notice from the bank. In order to initiate the overdraft facility, Anna must additionally pay the bank a $50 one-time or yearly arrangement charge. An overdraft facility is an example of one that is typical. Since overdrafts are flexible, Anna is free to use all $1,000 as she sees fit. She can also pay off the overdraft and then use the opportunity to withdraw money once more in the future. 

Though it would be rare, the lending bank has the legal right to request repayment at any moment. In terms of the interest rate they impose, overdrafts are also rather pricey. In addition, there may be a setup fee for the facility (known as an arrangement fee). In conclusion, bank overdrafts typically involve: • adaptable, allowing withdrawals, repayments, and subsequent withdrawals up to the overdraft limit ($1,000 in the case above). • In addition, an arrangement fee of up to $50 may be charged at a variable rate of interest (in the example above, the bank's overdraft rate). • Unsecured and reimbursable upon request.

​Kembara’s Financial Solutions - Retail and Commercial Bankings
Because we see retail banks on the main street, the majority of us are aware of what they do. Retail clients and retail banks are terms used to describe people and the financial institutions that serve them. A retail bank operates under a similar business model to the one that was described in the previous chapter: it seeks to raise deposits from individuals and uses those deposits to lend money to other individuals. Because it pays less interest on deposits than it does on loans, the bank should create a surplus. The bank can then utilize this surplus to cover its other costs, such as paying the staff's salaries and the property's renting. After covering all of these other costs, the bank will have made money if there is still a surplus.

​In the financial services industry, particularly in the US, the term "commercial bank" is frequently used. It is applied in one of two circumstances. In the US, it is a word that refers to all banks that engage in what have been described as a bank's primary functions up to this point: bringing in deposits and disbursing loans. The phrase "commercial banking" is frequently used in other regions of the world to distinguish banks that focus on offering banking services (deposits and loans) to commercial entities, or businesses, rather than to individuals. Since the majority of the business clients are corporate entities, or firms, the latter term is also referred to as corporate banking.

Since the majority of banks perform both services, it can be a little deceptive to categorize them as either retail or commercial. Just consider companies like Bank of America in the US, Lloyds and Barclays in the UK, and HSBC worldwide, which serve both corporate and retail clientele.

​Kembara’s Financial Solutions - Foreign Exchange
Foreign exchange (Forex, or FX) is the simple act of exchanging a certain amount of one currency, such $100 in US dollars, for a specific amount of another currency, like €90. There are many different foreign currencies in use today, and the most prevalent instance of the requirement for foreign exchange is when people travel to other countries.

Instead of their more familiar US dollars, an American traveling across the Atlantic to France for vacation will need euros. They will likely visit their bank ahead of time and buy a few hundred US dollars' worth of euros to acquire some. With an appropriate exchange rate of 0.86, their $200 would buy them €172. Travel by individuals therefore contributes to some foreign exchange activity, but this is overwhelmed by the impact of enterprises transacting business internationally.

A major order for surfboards is placed by a European retailer who wants to pay in euros at an American company called SurfBoards of America (SBoA). The European client pays SBoA thousands of euros when the surfboards are shipped. As a result, SBoA contacts the foreign exchange dealer at its neighborhood bank and offers to convert the euros for the US dollars it requires.

Since the US dollar is widely recognized as the most significant currency in the world, it is usual for foreign exchange rates to be given in terms of how many units of a certain currency one US dollar is worth. Offering foreign exchange quotes is appealing to banks and their dealers because it satisfies client needs resulting from global trade and travel, in particular. As a result, the banks and their dealers will receive fees. A draw for banks and dealers is that, according to reports, daily foreign currency activity in 2019 is estimated to approach a staggering $6.6 trillion (that's $6,600 billion), indicating the size of global trade.

​Kembara’s Financial Solutions - Insurance
In order to control financial risks, the financial services sector also includes insurance providers. The financial services industry comprises actions that are best categorized as risk management in addition to acting as a bridge between savers and borrowers. We all experience risk in our daily lives, and there are many examples of these hazards, including the danger of a car accident, the chance of a home invasion, and the risk of developing a major illness. By purchasing insurance from insurance providers, you can reduce your exposure to these and other hazards. For a series of premium payments, the insurance company will assume certain risks. The insurance provider will make a payment if the danger comes true.

There are many different types of insurance, from "marine insurance," which covers the risks that large shipping companies' ships may sink or collide with rocks, to "life insurance," which ensures that, in the event of a person's passing, their dependents will receive a lump sum of money sufficient to pay off the mortgage loan on the family home.

Vehicle Insurance
Charlie, who is 21 years old, recently purchased his first vehicle, a used Volkswagen Golf with a high specification that is seven years old and costs £7,000. Before Charlie drives the automobile on the road, he is required by law to have insurance. He makes contact with an insurance provider, who offers him a rate of £2,400 for a one-year coverage that will pay out in the event that Charlie is at fault for an accident. Charlie enrolls, agreeing to pay a £200 premium each month, and begins to relish operating his brand-new vehicle on the highway.

​Kembara’s Financial Solutions - Bond and equity markets
 
Markets that allow holders of stocks and bonds to buy or sell investments are another component of the financial services sector.
 
The following are some ways that stocks and bonds differ from one another: • Stocks give the holder a share in the company issuing them. But bonds don't.
 
• The repayment date for stocks is not fixed. • Equities do not pay interest; Bonds normally have a predetermined timetable for repayment. Bonds normally do pay an annual interest rate that is defined in percentage. With this in mind, why are investors prepared to invest in stocks when there is little to no chance that the issuing company will ever buy those stocks back?
Fundamentally, they want the business to succeed and turn a profit. Although the corporation may provide a portion of these profits to shareholders in the form of dividends, equity holders are aware that they will eventually be able to sell their shares of stock to another party. They will be able to realize their investment by selling the stocks, possibly for a profit greater than what they paid for the shares. The equity markets, which include renowned exchanges like the New York Stock Exchange (NYSE), Abu Dhabi Securities Exchange (ADX), London Stock Exchange (LSE), Europe's Euronext exchange, Japan's Tokyo Stock Exchange (TSE), and China's Shanghai Stock Exchange, provide facilities for the sale of stocks (SSE). Most nations have stock markets; further examples are the Singapore Exchange (SGX), Colombo Stock Exchange (Sri Lanka), Bombay Stock Exchange (India), Johannesburg Stock Exchange (JSE) (South Africa), and Tadawul (Saudi Arabia). These exchanges started off as gathering locations where buyers (or people representing them) would meet sellers (or people representing them) to agree on purchases and sales. Today, they trade millions of shares every day. Nowadays, the vast majority of transactions are conducted electronically, and most exchanges essentially function as online auction houses akin to eBay.
 
Bonds can be purchased or sold prior to their repayment dates, just like stocks. But unlike shares, most bonds are often bought and traded outside of the major markets. The fact that almost all bonds have a maturity or repayment date when the bondholder's IOU will be paid back is largely responsible for this. This will not occur for equity holders, hence a facility to sell the shares has historically been considerably more crucial. Bond buyers and bond sellers are connected electronically through facilities known as over-the-counter (OTC) facilities for those bond buyers who do want to sell their bonds before the payback date. OTC simply refers to transactions that are conducted outside of recognized exchanges.

​Kembara’s Financial Solutions- Risk and Reward
We have shown that savers can invest their extra cash in a number of different ways, most notably by making a bank deposit or by purchasing stocks or bonds. Why would they pick one investment over another, then? To learn more, take a look at the example below. Example Sophie wants to invest some money she has. When she hopes to use the money as a deposit for the purchase of her first home in two or three years, she wants to be pretty confident that she will be able to receive all of her money back. She has narrowed her options down to two: a two-year bond issued by a corporation that will pay 7% pa and an instant access bank deposit account that will pay 5% pa. Which one ought she to choose? The answer is that it relies on Sophie's flexibility preferences and the level of financial risk she is willing to accept. The two-year bond appears to be superior because its interest rate is 2% higher. The bond could be hazardous, though, as it might have been issued by a small business that might not have the resources to pay it back in two years. In the event that Sophie needed her money sooner than anticipated, she could do it because the deposit account has rapid access. The investment that Sophie should make will therefore depend on her preference: whether she would rather face a potentially higher risk in exchange for a higher reward, or take a lower risk in exchange for a lower gain and/or instant access. Making the appropriate financial decision is not always easy, as the aforementioned case shows. In actuality, there is always a direct correlation between the level of risk that an investor is ready to accept and the potential return on the investment. It's the equivalent of the fitness industry slogan, "No pain, no gain," in terms of money. In terms of investments, the investor's prospective degree of return will be less impressive the less likely it is that they would experience a financial loss. Risk and reward are mutually exclusive.

It might be simple to distinguish between investments with higher and lower risk. In general, there would be less risk over the long run if you bought shares in an established business like Microsoft® or Apple rather than a loss-making, early-stage startup. Similar to this, investing your extra cash in a deposit account at a reputable bank is probably going to be substantially less dangerous than lending it to a friend.