Certified Financial Management Specialist Practice Exam

In financial terminology, what is 'interest'?

1. Payment for borrowing money or earnings on savings

2. A fee for financial counseling

3. Tax on bank deposits

4. The cost of purchasing stocks

The correct answer is: Payment for borrowing money or earnings on savings

Interest is fundamentally defined as the amount paid for borrowing money or the earnings generated from savings. When individuals or businesses borrow funds from a lender, they are typically required to pay back not only the principal amount borrowed but also an additional sum, which constitutes the interest. This fee compensates the lender for the risk associated with the loan and the use of their money over time. Conversely, when individuals place money in a savings account or fixed deposit, they earn interest on those funds. This interest serves as a reward for allowing the bank to use their money. Thus, in either context—borrowing or saving—interest embodies the cost of money over time, either as a charge for its use or as a return for its provision. The other options do not accurately capture the meaning of 'interest' in financial terminology. Fees for financial counseling relate to personal or business service costs, taxes on bank deposits refer to governmental levies and have no connection to the concept of earning or paying interest, and stock purchasing costs are entirely distinct from the idea of interest.