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Types of Financial Institutions

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michelle ashmore

on 13 April 2017

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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 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
*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?
APY (Annual Percentage Yield): yearly rate of return you will earn on saving
You need to decide if you want: - to earn the highest APY
- the most access to your $ (liquidity)
Types of Savings
Standard savings
: gives liquidity in exchange for lower (APY) interest rate
(you can get your $ but don't earn much)
Certificate of Deposit (CD)
: gives 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 lets you to write checks or use debit card to withdrawal $

usually doesn't earn interest

debit card: electronic version of 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
Zooba Nooba financial institution provides savings, checking, and loan services to both businesses and individuals. Based solely on this information, Zooba Nooba is most likely
a. commercial bank
b. credit union
c. title pawn lender
d. credit card agency
2. Saving money for expensive things you want but don’t need is a rational economic decision because:
A people should focus on short-term goals, not long-term goals
B you give up a small benefit now but get a greater benefit later
C there are too many opportunity costs involved in saving
D the rewards of saving are rational, rather than intellectual

3. Mr. Price has $90,000 in his saving account when his bank declared bankruptcy. Which is true?
A Mr. Price’s savings will be transferred to an IRA.
B Mr. Price’s savings will be lost due to the bankruptcy.
C Mr. Price’s savings will be protected by the FDIC.
D Some of Mr. Price’s savings will be returned after the assets are sold.

4. Which type of financial institution is least concerned with making a profit and therefore offers lower interest rates for loans to members?
a. Commercial Bank
b. Pay Day Lender
c. Credit Union
d. The Federal Reserve

5. What is the term for the amount of money that all banks must keep on hand?
a. Premium rate
b. Liquidity ratio
c. Required reserve
d. Discount rate

6. Which type of savings account has the least liquidity, but offers the highest rate of interest?
a. Standard savings
b. Certificate of deposit
c. Money market savings
d. Mutual funds

fixed interest rate:
the rate charged on borrowing money does not change over the course of the loan
variable interest rate:
the rate charged on borrowing money changes based on an index over the course of the loan
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