Section 3 Banking and Financial Institutions

1
Section 3 Banking and Financial Institutions

• Financial services and Institutions
• Saving Accounts and interest rates
• Truth in Lending Act

2
Types of Financial Services

• Savings.
• Time deposits in savings and certificates of
  deposit.
  
• Payment services.
• Checking accounts commonly called demand
  deposits.
  
• Automatic payments.
• Borrowing - for the short- or long-term.
• Other financial services.
• Insurance, investment, real estate purchases, tax
  assistance, and financial planning are additional
  services you may use.

3
Types of Financial Institutions

• Deposit type institutions
• Commercial banks are corporations that offer a
  full range of services including checking,
  savings and lending.
  
• Savings and loan associations specialize in
  savings accounts and mortgage loans.
  
• Mutual savings banks are like traditional savings
  and loan associations, but they are owned by
  their depositors.
  
• Credit unions are user-owned and nonprofit.

4
Types of Financial Institutions

• Non-deposit type institutions
• Life insurance companies offer insurance plus
  investment and retirement planning
  
• Investment companies offer a money market fund.
  You can write limited checks on your account.
  
• Finance companies make personal loans.
• Mortgage companies lend for home purchase.
• Pawnshops make loans on possessions.
• Check-cashing outlets
• Title and payday loan companies - high interest
• Cyberbanking via phone and on-line, such as
  bankamerica.com or wellsfargo.com

5
Comparing Financial Institutions

• Basic concerns of a financial services customer
• Where can I get the best return on my savings?
• How can I minimize the cost of checking and
  payment services?
  
• Will I be able to borrow money when I need it?
• Cost of convenience and personal service
• Consider safety and interest rates.

6
Types of Savings Plans

• Regular savings accounts
• Club accounts
• Certificates of deposit
• Several types to chose from
• Managing by looking at earnings and costs
• Interest earning checking accounts
• Money market accounts and funds
• Money market accounts are covered by the FDIC,
  but money market funds are not
  
• U.S. savings bonds (see www.savingsbonds.gov)

7
Interest Rates on Savings

• Nominal Interest Rate - Interest rate that is
  annualized using simple interest. It is the rate
  that banks typically like to quote.

Annual Percentage Yield It is the rate that
banks are required to quote. Defined under the
Truth In Savings Act as the total amount of
interest that would be received on a 100
deposit, based on the annual rate of simple
interest and the frequency of compounding for a
365-day period, expressed as a percentage
calculated by a method which shall be prescribed
by the Board in regulations. It must be reported.
Effective Annual Interest Rate It is the rate
you want to calculate and evaluate. It is the
translation of any rate of interest/return into a
standardized annual rate that assumes annual
compounding. Since it looks at the actual
cash-flows, it captures the actual return of a
savings/investment.
8
Bank Fees That Affect Your EFF

• Management Fees
• Failure to meet minimum balance fees
• Frequent withdrawal fees
• Transaction fees on written checks or ATM
  transactions
  
• Early withdrawal penalties on term deposits and
  CDs

9
Evaluating Savings Plans

• Inflation - compare effective interest with
  inflation rate
  
• Liquidity Are you going to be able to access
  your funds fast without incurring fees or
  penalties?
  
• Safety via Federal Deposit Insurance Corp.
• FDIC insures up to 100,000 per person per
  financial institution (see www.fdic.gov).
  
• Other restrictions

10
Limitations of the APY

• Never take it at face value, it is intended to
  coincide with the EFF, but doesnt always do so.
  
• It is hard to say what formula the bank is really
  using.
  
• Many times banks neglect to include fees that are
  pertinent to your financial situation and needs.
  
• It is better to calculate your own EFFs.