1. 9
Chapter
Financial Institutions

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

3. Financial Service InstitutionsB O R W E S
Interest S A V E R
Interest
Interest
Interest
Can you think of any other types of borrowers?

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

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

6. 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

7. 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

8. 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

9. 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

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

12. 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.

13. 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.

14. 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.

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

16. 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

17. 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

18. States of the Market
Bull Market
Bear Market

19. 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.

20. 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

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

22. 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

23. 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)