1.

What is money? Who issues currency in our country?

Answer
When you buy something from a shop you pay the price by using money. You pay the school fee in
terms of money. Money is, thus a medium of exchange and a measure of value.
For practical purposes however money refers to the currency (notes and coins) that we use to buy
goods and services or carry on other transactions. Most of the currency notes, in our country, are issued
by the Reserve Bank of India. One rupee notes and coins are issued by the Government of India.

2. What are fixed interest rate loans and floating interest rate loans and what is their impact in a
borrowing decision?
Answer
Fixed interest rate loans are those in which the interest payable is fixed beforehand and the interest
remains constant throughout the tenure of the loan. For example .a loan of Rs.5000 at 12% interest
would carry the same rate of interest all through the five years. As against this, in the case of floating
interest rate loans, the interest payable is reset at pre-determined intervals according to a predetermined benchmark. For example, a loan of Rs.5000 which has a reset clause at every six months
may carry a floating rate of PLR + 0.5% .In this case, borrower may pay 12.5% for first 6 months if the
PLR is 12% currently. After 6 months, if the PLR is hiked to 13%, the interest charged to the loan
account becomes 13.5%. The floating rate will fall 10.0% if the PLR were to be 9.5%.
From the above, it can be seen that the interest earning/liability is known in advance in the case of Fixed
rate loan whereas the interest liability is subject to fluctuations in the case of floating rate loan. More
importantly in the case of increasing interest rates (rising interest rate scenario), the borrower will be
required to pay more interest than what he/she might have planned at the time of availing the loan.
3.

What is an EMI (Equated Monthly Installment) and how it is calculated?

Answer
Equated Monthly Installment (EMI) refers to the monthly payment a borrower makes on his loan.
Though it is a combination of interest payment and principal repayment, the total monthly amount is
calculated in such a way that it remains constant all through the repayment tenure. The below
mentioned example is given to explain the methodology.
Consider that a loan of Rs.1,00,000 is to be repaid over 25 years in equal monthly installments. If the
annual interest rate is 7%, the monthly EMI is calculated as follows:
(Since the repayments are monthly). So

4.
The EMI will be fixed as Rs.710 in this case by rounding off to the nearest 10 rupees.
Under EMI Calculator - all one has to do is to key in 'No. of Instalments (in Months)', 'Interest Rate' and
'Loan Amount', and the 'Monthly Payment EMI' will be automatically calculated and displayed.
Example of EMI Calculators :
EMI Calculators
How Much Do I have to Pay
How Much Loan can I afford
How Long will it take to repay

Examples of EMI Calculations :

It is also possible for the bank to stipulate that the interest will be paid by a customer as and when
charged, say quarterly, half yearly or annually and the principal loan be repaid in monthly, quarterly, half
yearly or annually. This is known as Equal Installment Method (EIM). Generally, banks adopt Equal
Installment Method for retail loans and small loans where the proponent gets monthly or daily cash flow.
4.

What is an APR (Annual Percentage Rate)? Why is APR important for a borrowing decision?
Answer
APR (also commonly referred to as Annualized Rate) is the annual rate that is charged for borrowing
expressed as a single percentage number that represents the actual yearly cost of funds over the term
of a loan. The purpose of the number is to function as a reference and comparison of similar rates. APR
assumes significance because lenders/banks may quote interest rates in different ways to customers
and the period of investment may vary from one day to many years. For example banks usually quote
interest rates per annum for their loans say personal loans at 18%.p.a. whereas credit card companies
advertise interest rates on a monthly basis, say 2% per month. The credit card rate if expressed on
annual percentage basis will be 24% p.a.
If a lender says that the interest rate for a loan is 0.7974% monthly and another lender says that the
interest rate for a loan is 9.569% annually, both refer to an APR of Rs.10% with monthly rest (i.e.,
interest rate is compounded monthly). APR helps to standardize how interest rates are compared, so
that a 10% loan is not made to look cheaper by calling it a loan at 0.7974% paid monthly.

5.

My friend recommends that I should go for a longer term EMI, in which case my repayment
burden will be less. His reasoning is that longer EMI will lead to lower installment amount
and hence less burdensome?
Answer
While choosing an EMI, the customer is expected to make an informed choice by taking into
account his/her cash flow, cash available for repayment, the interest liability on the loan etc.
Let us consider the following example :
Particulars

Option A

Option B

Option C

Loan Amount

Rs.1,00,000

Rs. 1,00,000

Rs.1,00,000

Interest

12%

12%

12%

Tenure

60 months

120 months

90 months

EMI

Rs 2230

Rs.1,440

Rs.1,690

Total Repayment

Rs. 1,33,800

Rs. 1,72,800

Rs.1,52,100

The loan amount in all the three cases is the same. In the case of A, the total interest liability for the 5
year loan period is Rs.33,800/- where as the total interest liability for 10 years is higher at Rs.72,800/in Option B and Rs.52,100/- for Option C for the same loan amount. Therefore, the customer will end
up paying more interest if he opts for longer tenure EMI
On the other hand the annual repayment in the case of Option A will be Rs.26,766/- while in Option B
it will be Rs.17,280/- and in Option C it will be Rs.20,280/In choosing A or B or C, the customer has to take into account the available cash flow and decide

6.

What is the difference between simple interest and compound interest and in the case of a
deposit of Rs.1,000/- made with a bank for 3 years at 10%, how interest would be calculated?
Answer
Simple interest is interest paid only on the "principal" where as compound interest is calculated, not only
on the principal, but also on the interest that has accrued, or built up, at the time of the calculation. The
depositor has to clearly indicate to the bank at the time of making the deposit that he would like to take
advantage of compound interest rate and ask for a reinvestment deposit scheme.

Illustration

Simple
Interest(Rs.)
Amount of Deposit

1,000

Compound Interest(*)
(Rs.)
1,000

Amount receivable After

1,100
1,103
One Year
Amount receivable After
1,200
1,218
Two Years
Amount receivable After
1,300
1,344
Three Years
Note: (*)Interest on Interest Earned is added to the principal amount
quarterly