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Types of Financial Institutions

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by

michelle ashmore

on 15 March 2016

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Transcript of Types of Financial Institutions

How banks
make a profit
SERVICES OF
FINANCIAL INSTITUTIONS
SAVINGS
your $ is safe and earns interest

your $ is protected by the
FDIC (Federal Deposit Insurance Corporation) - if the bank fails, your $ is protected up to $250,000
CHECKING
LOANS
borrowing money from the bank/other institution with the promise to repay plus interest.
Types of
Financial Institutions
Financial Institutions and Interest
Commercial Bank
safe place to store $, direct deposit, checking/debit, and loans (credit card, home, etc)
ex: Charter, CB&T
Savings and Loan
provides savings, and mortgage loans only to individuals
*most common
Credit Union
provides services of a bank, but only to members (who control the credit union)
can provide better rates
ex: Georgia Federal Credit Union (for government employees)
Deposits from people

interest charged for borrowing (loans)

fees for services
$ out of the bank
Interest earned on savings (.03%)

Money loaned to people
(who have to pay interest)

Operation costs
(utilities, wages, etc)
BANK
Has to keep a certain percentage on hand ...
REQUIRED RESERVE RATIO (RRR)
$ into bank
Banks main source of profit...
Interest
bank charges more to borrow (loans) than it pays you to save
interest earned: money from bank to people for saving

interest charged: money from people to bank for loans
Which type of savings should I get?
the APY (Annual Percentage Yield) is the yearly rate of return you will earn on saving
You need to decide if you want to earn the highest APY or you want the most access to your $ (liquidity)
Types of Savings
Standard savings: offers liquidity in exchange for lower (APY) interest rate
(you can get your $ but don't earn much)
Certificate of Deposit (CD): offers a higher (APY) interest rate in exchange for less liquidity
(you earn more $ but can't access until contract time is up)
Money Market Savings: offers a higher (APY) interest rate and more liquidity in exchange for keeping a minimum balance ($1000-$2500)
account that allows you to write checks or use debit card to withdrawal $

usually do not earn interest

debit card: an electronic version of a check. you MUST have money in your account to use (different from credit card!)
ex: credit cards, car loans, student loans (subsidized and unsubsidized), home (mortgage)
interest is usually compound!
short term loans given with promise to pay back by next paycheck.

interest charged can be up to 400%

ex: you borrow $600 so you can get the iPhone 6. When you pay the loan back in 15-30 days -- $600 x 400% = $2400
Title loans work the same way
INTEREST
interest charged: the price you pay for borrowing money
~ when? credit, loan for
home, car, college,
personal needs

interest earned: the money banks pay you for saving (standard, CD, or money market)
TYPES OF INTEREST
SIMPLE INTEREST
interest paid only on principal (money borrowed)
formula: I = PRT
I=Interest
P=Principal
R=Rate (%)
T=Time (years)
when is simple interest used? standard savings
PRACTICE
I=PRT
I=? P=500 R=.03% (.0003) T=3

I=(500)(.0003)(3)
I=.45

so now Bobby has to add the interest to his principal to find out how much he has in savings...

500+.45 = 500.45
Bobby puts his $500 into a standard savings account that earns .03% a year. He keeps his money in the account for 3 years. How much has Bobby earned?
COMPOUND INTEREST
interest on principal + previous interest
formula: I=P+(PxR)

P=Principal
(each year P changes from previous year)

R=Rate

PRACTICE
If Jenny deposits $500 in a CD paying 5% compound interest for 3 years, how much does she earn?
500 + (500 x .05) = 525

525 + (525 x .05) = 551.25

551.25 + (551.25 x .05) = 578.81
year 1
year 2
year 3
when is compound interest used? CD, loans, credit cards
compound = $578.81
simple = $500.45
initial = $500
RULE OF 72
a quick way to estimate the amount of time it will take for your money to double when put in savings at a certain % rate.
Formula: 72/R

R= % rate
percentage years to double
1
2
3
4
5
6
72/1 = 72 years
72/2 = 36 years
72/3 = 24 years
72/4 = 18 years
72/5 = 14.4 years
72/6 = 12 years
for our compound interest problem...

$500 at a 5% rate. How long would it take to double?


Simple Interest problem ...

$500 at .03% rate. How long would it take to double?
PRACTICE
*have to calculate for each new year
Full transcript