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Function of a bank
1) What is the function of a bank?
2) Why and when did banks start giving away toasters?
3) How do banks make money?
OK, let's get the obvious point out of the way: A bank is something that holds your money and keeps it nice and cozy.
But why do banks exist? Well, they're not some benevolent entity that's just out to keep your money safe. They're out to make money, just like every other company. How do they do that?
They take your money and lend it to somebody else, and then they make money on it.
Banks say they're holding it for you and even "guarantee" you'll get it back. But what they actually do is take your money, lend it to somebody else, and charge that person an interest rate. It's called a loan, and they do it all the time.
See, a bank says, "You've got $100 in your piggy bank. Why don't you put that money in our bank? At the end of the year, we'll give you five percent interest."
Now you have $105 — and here's a free keychain, to boot! That's not a huge amount of money, but it's better than only getting $100 back, right? Right. You've made $5 off the bank, and that's pretty smart.
But where does the bank get that extra $5?
What they do is take your $100 and lend it to somebody who's likely to pay it back: They lend it to somebody who's going to build a school, start a business, or buy a home.
These buyers and builders are willing to pay the bank $10 for a $100 loan. They tell the bank, "I'll pay you back $110 in a year if you lend me $100 right now." You give the bank $100, and they give you back $105 — the bank keeps the remaining $5.
That's the only thing that banks do — they lend the money and get back more than what they lent. But is putting your money in a bank the best way to make it work for you? Well, that's for you to decide.
Three Facts to Wow Your Friends at a Party
1) The word "bank" derives from the Italian word banco, which means "desk" or "bench." This furniture was used during the Renaissance by Florentine bankers, who used to make their transactions above a desk covered by a green tablecloth.
2) The largest cash robbery of a bank was the Loomis Fargo bank robbery in 1997, in which $17.3 million was stolen from a regional office vault in Charlotte, NC. Note to potential thieves: The bad guys were caught, and 95 percent of the money was recovered.
3) Banks began giving away toasters to attract new customers after the Great Depression.
You Can Take That to the Bank!
Your birthday just happened (sorry we missed it), and your grandma sent you $100. Awww, she's so sweet. So what should you do with your newfound bounty?
If you headed to your neighborhood bank and put it in a savings account, they'd pay you 0.75 percent in interest. That means if you checked on your precious money again in a year, you'd have $100.75.
That might not seem like a lot, but that's the trade-off you make here: The money is safe, and low risk gives you low return.
Now let's say years pass, and you took that money your grandma gave you and opened a bakery, but now you need some money to buy some sugar and butter. (We love your chocolate croissants, by the way.)
Where can you get this money?
Well, you're one bakery, so it's just you. You go down to your local bank and ask them for a loan.
They'll ask you some tough questions: What you want to do with the money, how you are going to pay them back, etc. Eventually, they decide to lend you $5,000, but they're going to charge you eight percent per year on the loan.
If you pay them back at the end of the year, you'll owe them $5,400 (because eight percent of $5,000 is $400, but surely you didn't need us to tell you that).
Then here's what the bank does with that $400: They give interest to people like you who put their $100 in the bank as savings, they pay their employees, they keep their lights on and their bushes manicured... and the rest is sweet profit.
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