1. a. Compare services offered by different financial institutions. b. Explain reasons for the spread between interest charged and interest earned. c. Give examples of the direct relationship between risk and return. d. Evaluate a variety of savings and investment options; include stocks, bonds, and mutual funds. SEPF2 The student will explain that banks and other financial institutions are businesses that channel funds from savers to investors.

2. The Bank Place to house money Money can be kept in checking and savings deposits Store valuable possessions : jewels, stocks, documents (safety deposit boxes in vault) Offers LOANS : mortgage, credit cards, car, personal, business, …. etc. Interest creates a RETURN, yet still includes RISK!!!

3. Loans & Credit Source – Financial Institutions Types of Financial Institutions include: 1)Commercial Banks: accept deposits & lend $; transfer funds among banks, businesses and individuals: today control largest amount of $ and offer widest range of services. 2)Credit Unions: formed by employees; owned & operated by its members to provide low-interest loans only to its members.

4. Types of Financial Institutions Continued 3) Savings and Loan Association: similar to commercial bank (deposits & loans); originally called “building societies” for purpose of home building. 4) Savings Bank: similar to S & L’s in that most of their business comes from savings and home loans; originally created to serve the “small saver” overlooked by large banks. 5) Consumer Finance Companies: take over contracts for installment debts from stores and add fees for collection; PLUS …often used by people unable to obtain credit from other routes; higher interest rates!

5. Questions For Review: 1. Which of the following types of institutions will allow for both deposits and lending money. It also controls the largest amount of money and offers the widest range of services today? A. Commercial Banks C. Credit Unions B. Consumer Finance companies D. Savings Bank 2. What is the difference between a Credit Union and a Commercial Bank? A. Credit Unions are owned and operated by its members to offer higher interest rates on loans than Commercial Banks. B. Credit Unions are safer than Commercial Banks. C. Credit Unions are owned and operated by its members to offer lower interest rates on loans than Commercial Banks. D. Credit Unions are insured by the Federal Government to insure deposits and Commercial Banks are not.

6. Questions For Review: 3. Frankie and Suzy are married and are planning to build a home. Both have only been working in their job for 4 years, where should they try to get a loan to build their home? A. Credit Union C. Bank of America B. Laurens Savings & Loan D. EZ Credit 4. John needs cash fast and does not have a job but owns a 2005 Ford Mustang. Where would John most likely get the cash he needs without having to verify most of his current income? A. Local Commercial BankC. Title Max B. Heartland Mortgage Co.D. Credit Union

7. Reserve Requirement Federal Reserve system requires banks to keep certain amounts of money on hand A percentage of total deposits Current Reserve Requirement = 10 % of value of all checking and savings accounts

8. Channeling Funds from Savers to Investors Banks and other Financial Institutions are BUSINESSES that channel funds from the people who “ save ” money to people who “ borrow ” for investment purposes. Can you think of a situation where this would happen?

9. Savers Include … People seeking to save money through a variety of means. How?? Buying government securities such as bonds (regularly offered) by investing in them the investor is offered interest Buying corporation stock in exchange for ownership in the company. Investing in mutual funds pooling monies to increase purchasing power.

10. Investors Include … People seeking to earn more ( future ) money through an investment of present money. Stocks: ownership in a company (offered dividends as a form of payment that might not be guaranteed). Bonds: government securities (lent money out to be paid interest on the loan). Mutual Funds: a collection of investments (money combined with others and managed by one group to increase purchasing power and profits). Business Start-Up : entrepreneurship

11. The Relationship Between “Risk” and “Return” Risk : chance taken that money loaned will be repaid by borrower Return : amount received through repayment of original loan PLUS INTEREST Many loans are insured by … COLLATERAL it is often property.

12. Examples of Risk and Reward

13. Questions for Review 1. Which of the following will allow for good profit returns if the economy is functioning at high level? A. Mutual fundsC. Stocks B. SavingsD. Bonds 2. Which sentence describes the risks and returns of investing in stocks? A. They offer the lowest risks and the lowest potential returns. B. They offer the highest risks and the highest potential returns. C. They offer the lowest risks, but the highest potential returns. D. They offer the highest risks, but the lowest possible return.

14. Difference Between “ Interest Charged ” and “ Interest Earned ” Why? = profit for bank as a business Interest Rate : the percentage amount of payment by borrowers to the lender. Interest Charged: is determined on a loan amount or credit account by the lender (lender makes profit). Interest Earned: is determined on a savings, checking, etc. once your money is deposited and the bank owes you (depositor makes profit). Two types: Compound Interest rate and Simple Interest rate; Compound is greater than Simple rate.

15. Questions for Review: 1. Juan goes to the Southern Union Bank to get a loan. Juan has an account at the bank on which he receives 2.2% annual interest. Which of the following can be said of the rate of interest he will pay on the loan that he takes out? A. It will be lower than 2.2%. B. Nothing can be known about it, because he has not yet applied. C. It will be higher than 2.2%. D. He will be denied the loan. 2. On which of the following loans would one be MOST LIKELY to pay the highest interest rate? A. A home mortgage loan B. An automobile loan C. A credit card D. A student loan for college