Pesonal finance 6th madura chapter 05 banking and interest rate

• Depository institutions: Financial institutions that accept deposits from individuals and provide loanscommercial and personal loans  Deposits insured by Federal Deposit Insurance Cor

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SIXTH EDITION

Chapter 5

Banking and Interest

Rates

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5.1 Describe the types and functions of financial institutions

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• Depository institutions: Financial institutions that accept deposits from individuals and provide loans

commercial and personal loans

 Deposits insured by Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor

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mortgage and personal loans to individuals

affiliation

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• Nondepository institutions: financial institutions that do not offer federally insured deposit accounts, but provide various other financial services

individuals

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providing investment banking and brokerage services

firms against possible adverse events

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– Investment companies: nondepository institutions that sell shares to individuals and use the proceeds to invest in securities to create mutual funds

services to individuals or firms

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• Checking services

 Fees are charged for

– Paying bills after the deadline– Making loan payments after the deadline– Ignoring the rules of a car lease contract, such as maximum mileage allowed

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 Online bill pay

 Online account transfers

 Electronic deposits

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– Monitoring Your Account Balance

 Record checks in your checkbook as you write them

 Make sure the bank statement agrees with your check register

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EXHIBIT 5.2 Example of a Worksheet to Reconcile Your Bank Statement

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EXHIBIT 5.2 Example of a Worksheet to Reconcile Your Bank Statement

$100

Balance shown on bank statement $600

$100

Adjusted bank balance

(your prevailing bank balance) $400

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is reduced

checks, virtually eliminating float

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• Credit card financing such as Visa and Mastercard

account

 Convenient way for parents to transfer funds to children, but may encourage overspending

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documents, jewelry, or other valuables

withdraw funds any time of the day

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• Cashier’s check: a check that is written on behalf of a person to a specific payee and will

be charged against a financial institution’s account

in advance

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against a large well-known financial institution or credit card sponsor’s account

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• Criteria Used to Select a Financial Institution

 Close to where you live or work, convenient ATM locations, online banking

 Comparison shop for best interest rates

 Some consumers using Wal-Mart to avoid fees

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• Interest rates on deposits and loans affect your cash inflows and outflows

specifies a minimum investment, an interest rate, and a maturity

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deposit guaranteed by the government

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• Impact of the economy of the risk premium

sell their securities, resulting in investors reluctance to purchase the securities for fear the firm might go bankrupt and not repay their debt

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relevant interest rates

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• Twisted perception of the risk premium

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 If you will need your money within a year, you should take no risk

 If you will need a portion of your money when your investment matures, you can afford to take some risk

 No choice is right for all investors

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• Term structure of interest rates: the relationship between the maturities of risk-free debt securities and the annualized yields offered on those securities

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the Wall Street Journal and illustrate how returns change over time

and firms They make a profit on the spread between the two rates

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• Go to www.bankrate.com

upcoming meetings, as well as forecasts of future policy decisions and the potential impact of these decisions

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EXHIBIT 5.3 Annualized Deposit Rates Offered on Deposits with Various Maturities

Maturity Annualized Deposit Rate (%)

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• Monetary policy: the actions taken by the Federal Reserve to control the money supply

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• Shift in the government demand for funds

interest rates

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GOALS FOR BANKING SERVICES

1 Identify the most important banking services.

2 Determine which financial institution will provide me with the best banking services.

ANALYSIS

Characteristic How It Affects Me

Interest rate offered on deposits This will affect the amount of interest income I earn on deposits.

Interest rate charged on mortgages I could use the same financial institution if I buy a home in the future.

Interest rate charged on personal

loans

I could use the same financial institution if I obtain a personal loan in the future.

Fees charged for checking services I will be writing many checks, so I would prefer not to pay fees on a checking account if I maintain the minimum

balance.

Location The ideal financial institution would have a branch near my apartment building and near where I work.

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DECISIONS

Decision Regarding Important Characteristics of a Financial Institution:

My most important banking service is the checking account because I will write many checks every month I prefer a bank that does not charge fees for check writing if I maintain a minimum balance I also value convenience, which I measure by the location

of the financial institution’s branches, and its online and mobile banking services I would prefer a financial institution that offers reasonable rates on its deposit accounts, but convenience is more important to me than the deposit rate.

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Decision Regarding the Optimal Financial Institution:

After screening financial institutions according to my criteria, I found three financial institutions that are desirable I selected

Quality Savings, Inc because it does not charge for check writing if I maintain a minimum balance, has branches in convenient locations, and offers online and mobile banking It also pays relatively high interest rates on its deposits and charges relatively low interest rates (compared to other financial institutions) on its loans I may consider obtaining a mortgage there someday if I buy a home, as its mortgage rate was comparable to those of other financial institutions.

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