4.1: DEPOSIT ACCOUNTS CHAPTER 4: DEPOSITS IN BANKS.

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Presentation transcript:

4.1: DEPOSIT ACCOUNTS CHAPTER 4: DEPOSITS IN BANKS

TRANSACTION ACCOUNTS Account that allows any number of transactions at any time DEMAND DEPOSITS Payable on demand whenever you want it Examples Checking (Simple & Interest-Bearing) Traveler’s Checks Automatic Transfer Service (auto bill pay)

CHECKING ACCOUNTS Basic Simple services at minimal or no cost Possible extra costs: ATM Debit card Return of cancelled checks Many banks offer a form of this type; use many different names Interest-Bearing Pays interest on balance if it’s maintained Higher interest if higher minimum balance usually Balance may be average for month or preset minimum Service charges may apply if you go below minimum

CHECKABLE DEPOSITS Deposits that cover demand deposit transactions Funds deposited in checking accounts M1—Highly Liquid Banks must hold reserve funds on these since money could be moved immediately Other Demand Deposit Transactions Traveler’s Checks ATS (Automatic Transfer Service=automatic bill pay)

ASSIGNMENT What is a transaction account? Why are transaction accounts considered demand deposits? Why can the funds in transaction accounts affect the money supply?

TIME DEPOSITS Deposits held for a certain time Until maturity Less liquid than checkable accounts Not Not subject to the Fed’s reserve requirement Examples: Savings Accounts Money Market Deposit Accounts Certificates of Deposit Money Market Mutual Fund Accounts coming up soon

SAVINGS ACCOUNTS One of the safest places to put money FDIC Insured per depositor up to $250,000 Banks may reserve right to require up to 7 day notice to withdraw from account Statement savings Used to be passbook savings Monthly or quarterly statement sent or ed Account activity details Interest earned Fees charged Low interest earned but high safety & liquidity

MMDAS Earns higher rate of interest than savings Usually need larger initial deposit to open Minimum balance requirement to avoid fees FDIC insured Money held by bank Bank invests your money in mutual funds Government & corporate securities

MMMFAS

CDS Certificate offered by a bank, guaranteeing payment of a specified interest rate until designated date (maturity date) 7 days to 10 years (but usually < 18 months) Larger amount & longer terms = greater interest rate Some have variable rates Usually interest is higher than money market or savings rates Penalty for early withdrawal Safe—FDIC insured Not very liquid Consider maturity date when investing: If interest rates go up until maturity, CD won’t earn as much as other time deposits If interest rates go down, CD earns more than other deposits

CREDIT UNIONS Transaction accounts & time deposits are shares in the credit union Shareholders are owners Receive dividends Share-draft account = checking account Share account = savings account Share certificate = CD

ASSIGNMENT List 3 types of time deposits. Which of these are exempt from reserve requirements? Imagine you have $1,000 to invest. Would you choose to put your money in a regular savings account at 3% interest, a money market deposit account at 4.5% interest, or a 12 month CD at 5% interest? WHY?