9 Chapter Financial Institutions

Chapter Objectives Students will learn: Basic functions of financial service institutions Basic functions of financial intermediaries Basic properties of stocks and bonds

Financial Service Institutions B O R W E S Interest S A V E R Interest Interest Interest Can you think of any other types of borrowers?

Business Growth Profits vs. Lending Savings is investing Capital investments = economic growth

Banking Products Keeping Money Safe (insurance, FDIC) Transferring Funds (portability, access) Loaning Money (interest, investing)

Certificate of Deposit -CD Promissory note issued by a bank  Time deposit that restricts holders from withdrawing funds on demand which is how you earn more INTEREST on your money Early withdrawal will often incur a penalty Purchase a $10,000 CD with an interest of 5% compounded annually and a term of one year. At year's end,  the CD will have grown to $10,500

Federal Deposit Insurance Corporation - FDIC Insures deposits in the U.S. against bank failure Created in 1933 to maintain public confidence and encourage stability in the financial system through the promotion of sound banking practices Insure deposits of up to US$250,000 per institution

Financial Intermediaries Financial intermediaries are institutions that help channel funds from savers to borrowers. Banks, Savings and Loan Associations, and Credit Unions Take in deposits from savers and then lend some of these funds to various businesses Finance Companies Make loans to consumers and small businesses, but charge borrowers higher fees and interest rates to cover possible losses Mutual Funds A company that pools the savings of many individuals and invest this money in a variety of stocks and bonds issued by other companies Life Insurance Companies Provide financial protection to the family, or other beneficiaries, of the insured when the customer pays annual PREMIUM. (bill) Pension Funds Are set up by employers to collect deposits and distribute payments to retirees

The Flow of Savings and Investments Financial intermediaries accept funds from savers and make loans to investors. Financial Intermediaries Savers make deposits to… Commercial banks Savings & loan associations Savings banks Mutual savings banks Credit unions Financial Institutions that make loans to… Life insurance companies Mutual funds Pension funds Finance companies Investors

stocks and bonds BONDS STOCKS Primary Market Secondary Market Securities Market OTC Market BONDS STOCKS

Stock Exchanges The New York Stock Exchange (NYSE) The NYSE is the country’s largest stock exchange. Only stocks for the largest and most established companies are traded on the NYSE.

Stock Exchanges NASDAQ-AMEX NASDAQ-AMEX is an exchange that specializes in high-tech and energy stock. The OTC Market The OTC market (over-the-counter) is an electronic marketplace for stock that is not listed or traded on an organized exchange (listed on the NASDAQ) Daytrading Daytraders use computer programs to try and predict minute-by-minute price changes in hopes of earning a profit.

Stock Performance Indexes The Dow Jones Industrial Average (DJIA) The Dow is an index that shows the stocks of 30 companies The Standards & Poor’s 500 The S & P 500 is an index that tracks the performance of 500 different stocks in multiple MARKETs have changed in value.

What are Five Types of Bonds? 1 3 Chapter 11, Section 2

U.S. Savings Bonds bond that offers a fixed rate of interest over a fixed period of time attractive because they are not subject to state or local income taxes one of the safest types of investments because they are endorsed by the federal government Borrowing directly from savers

Money Market & Mutual Funds Money market mutual funds are special types of mutual funds. high liquidity and very short maturities are traded a means for borrowing and lending in the short term, from several days to just under a year Investors receive higher interest than they would receive from a savings account or a CD. However, assets are not FDIC insured. 1 3 Chapter 11, Section 2

States of the Market Bull Market Bear Market

The Bull vs. The Bear When the stock market rises steadily over time, a bull market exists. When the stock market falls over a period of time, it’s called a bear market.

RISK Bear market < bigger risk =high return Mutual funds reduce risk Shares in a company that invests in stocks and bonds of other companies Diversification reduces risk Expert analysis and advice Dividends

Equities stock or any other security representing an ownership interest in a corporation

Futures Financial contract obligating the buyer to purchase an asset (or the seller to sell an asset), at a predetermined future date and price Can’t back out or change your mind

Options Financial derivative that represents a contract sold by one party (option writer) to another party (option holder) The contract offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security or other financial asset at an agreed-upon price (the strike price) during a certain period of time or on a specific date (exercise date)