PERSON A FIN AN C

L E

Banking and
Interest Rates
GROUP 3
TYPES OF
FINANCIAL
INSTITUTIONS
Financial
Institutio
n
- IS A I N S T I T U T I O N OR
O RGA N I Z A TI O N TH A T
 TYPES OF FINANCIAL OR
BANKING INSTITUTIONS
DEPOSITORY INSTITUTION
-
offer traditional checking and
savings account.
- also provide loans
- pay interest on saving deposits
- change interest on loans
THREE TYPES OF DEPOSITORY
INSTITUTIONS
a.) COMMERCIAL BANKS
- The primary function of this is to
accept
savings deposits, check deposits, and
 THREE TYPES OF
DEPOSITORY INSTITUTIONS
b.) SAVINGS INSTITUTIONS/ THRIFT INSTITUTIONS
- Specializes in offering
savings accounts and
originating home
mortages for consumers.
 THREE TYPES OF DEPOSITORY
INSTITUTIONS
c.) CREDIT UNIONS
- Non-profit depository Institutions that serve
members who have common affiliation ( such
as the same employer of the same community
 TYPES OF FINANCIAL OR
BANKING INSTITUTIONS
NON-DEPOSITORY INSTITUTIONS
- Financial Institutions that do
not federally insured deposit
accounts, but provide
various other financial
 FOUR TYPES OF NON-
DEPOSITORY INSTITUTIONS
a.) FINANCE COMPANIES
- Specialized in providing
personal loans to
 FOUR TYPES OF NON-
DEPOSITORY INSTITUTIONS
b.) SECURITY FIRMS
- Facilitates the purchase or
sales
of securities by firms of
individuals by providing
investment banking services
 FOUR TYPES OF NON-
DEPOSITORY INSTITUTIONS
c.) INSURANCE COMPANIES
- Provide insurance to protect individuals
or firms from the financial consequences
of possible adverse events.
 FOUR TYPES OF NON-
DEPOSITORY INSTITUTIONS
d.) INVESTMENT COMPANIES
-A Financial Institution principally
engaged in investing in
securities.
-Designed for long term
TYPES OF FINANCIAL OR BANKING
INSTITUTIONS
FINANCIAL CONGLOMERATES
-Financial Institutions that offers a diverse set of
financial services to individuals or firms.
- Financial Conglomerate aims to serve as one-stop
shop,
where individuals can conduct all their financial
BANKING AND SERVICES
OFFERED
CHECKING SERVICES
a checking services is a deposit account held at a financial
institution that allows withdrawals and deposits. Also called
demang accounts are very liquid and can be accessed using
checks, automated teller machines and electronic debits
among other methods.
-Debit cards
-Mobile banking
-Paying bills on time
-Monitoring your account balance
-Reconcilling your account balance
BANKING AND SERVICES
OFFERED
SAVINGS ACCOUNT
A savings account is a basic type of bank
account that allows you to deposit money,
keep it safe, and withdraw funds, all while
earning interest. Savings accounts offered by
most banks, credit unions, and other financial
institutions are FDIC insured and typically pay
interest on your deposits.
BANKING AND SERVICES
OFFERED
CREDIT CARD FINANCING
Is the ability to electronically fund a new
account, business, or other lol venture
by using a credit card. Credit card
funding allows an individual or business
to use a readily available source of
funds, though the funds are being
borrowed and, thus, carry an interest
BANKING AND SERVICES
OFFERED
SAFETY DEPOSIT BOXES
A bot at a financial
institution where a
customer can store
documents, jewelry or other
valuables.
BANKING AND SERVICES
OFFERED
AUTOMATED TELLER MACHINES (ATMs)
A machine where
individuals and deposit and
withdraw funds any time of
the day.
BANKING AND SERVICES
OFFERED
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.
CASHIER'S CHECK
BANKING AND SERVICES
OFFERED
MONEY ORDER
A check that is written on
behalf of a person for a
fixed amount that is paid
in advance.
BANKING AND SERVICES
OFFERED
TRAVELER'S CHECKS
A check that is written in
behalf of an individual and
will be charged against a
large well- known financial
institution or credit card
sponsor account.
BANKING AND SERVICES
OFFERED
CHECK FLOATS
When you write a check, your checking account
balance is not reduced until reduced until the
check is cashed by the recipient and the check
clears. The time from when you write your
checking account balance is reduced is referred
as the float. In 2004, the check cleaning for the
21st century act was implemented. Banks many
transmitted electronic images of checks.
 SELECTING FINANCIAL
INSTITUTIONS
FIN AN CIAL IN STITUTI
ONS

- Intermediaries or bridges between

the fund sources and the fund
CRITERIA USED
TO SELECT A
FINANCIAL
INSTITUTION
 CONVENIENCE
You should be able to deposit and
withdraw funds easily, which means
the financial institutions should be
close to where you live or work. You
should also benefit if it has ATM's in
convenient locations. Most financial
institutions offer internet banking and
mobile apps.
PAYING BILLS ONLINE
Many Institutions have
established a system in
which you can pay
bills online instead of
writing and sending
DEPOSIT RATES AND INSURANCE
The interest rates offered on
deposits vary among financial
institutions. Web based
financial institutions tend to
pay higher deposit rates.
 FEE'
S
Many institutions charge
fee's for various services.
- Avoid financial
institutions that charge
high fee's on servicesyou
will use frequently.
INTEREST RATES O N
DEPOSITS AND LOANS
CERTIFICATE OF DEPOSIT (CD)
An instrument that is issued by a
depository institution and specifies a
minimum investment, an interest
rate, and a maturity date.
INTEREST RATES O N
DEPOSITS AND LOANS
RISK-FREE RATE
A return on an investment that is
guaranteed for a specified
period.
INTEREST RATES O N
DEPOSITS AND LOANS
RISK PREMIUM
An additional return beyond the risk-free rate
that
can be earned from a deposit guaranteed by
the government.
▪
Impact of the Economy on the Risk
Premiun
INTEREST RATES O N
DEPOSITS AND LOANS
COMPARING INTEREST RATES AND RISK
When considering investments that have different
degrees of risk, your choice depends on your risk
tolerance. If you plan to use all your invested
funds for necessities one year from now, you may
need to avoid risk completely.
In this case, you should choose a risk-
free investment because other
investments could be worth less in
one year than they are worth today.
The trade-off is that you will receive a
relatively low rate of interest on your
investment.
INTEREST RATES O N
DEPOSITS AND LOANS
TERM STRUCTURE OF INTEREST RATES
When considering investing in bank deposits or other
debt
securities, you must first determine your timeline
for investing. When investors provide credit to
financial markets, the relationship between the
maturity of an investment and the interest rate on
INTEREST RATES O N
DEPOSITS AND LOANS
SHIFTS IN THE YIELD CURVE
The current day’s yield curve is compared to
the
curve from one week ago and four weeks
ago. This allows you to easily see how the
returns from investing in debt securities
INTEREST RATES O N
DEPOSITS AND LOANS
LOAN RATES
Financial institutions obtain many of their funds by
accepting
deposits from individuals. They use the money to provide
loans to other individuals and firms. In this way, by
depositing funds, investors provide credit to financial
markets. Financial institutions must charge a higher interest
rate on the loans than they pay on the deposits to have
Exhibit 5.5 shows the relationship between the one-year CD rate and the
average one-year rate on loans to individuals. Notice how the loan rate
rises when financial institutions must pay a higher rate of interest on the
CDs that they offer.
 WHY INTEREST RATES
CHANGE?
A change inthe risk-free interest rates
causes other interest ratesto change.
Therefore, understanding why the risk free
interest rates changes allow you to
understand why other interest rates
change. Because the interest rates is
influenced by the interaction between the
supply and the demand for funds, a shift
in demand will cause a shift in the interest
SHIFT IN MONETARY POLICY
MONEY SUPPLY
The money supply consist of demand
deposits checking accounts and currency held
by the public. The money supply is
commonly used by investors as the indicator
of the amount of funds that financial
institutions can provide to consumers or
business as loans.
SHIFT IN MONETARY POLICY
MONETARY POLICY
Monetary policy is a process by which
country's monetary authority
controls the money supply usually
targeting a certain level of interest
for the purpose of promoting
economic growth and stability.
SHIFT IN MONETARY POLICY
OPEN MARKET OPERATIONS
The Federal Reserve Bank has funds that are
not deposited in any commercial banks or
other financial institutions. The Fed most
commonly conducts monetary policy through
open market operations, which involves
buying or selling Tresury Securities ( debts
securities issued by the Tresury ).
 SHIFT IN THE BUSINESS
DEMAND FOR FUNDS
When economic conditions change, business review
their spending plans and adjust their demand for funds.
This shift in demand affects the interest rate. During the
credit crisis in 2008-2009. Economic conditions weakened
sustantially. Many firms reduced their expansion plans,
which meant that they would not need to borrow as much
money. This reflects a decrease in the demand for funds
and results in lower interest rates. Conversely, more
favorable economic conditions have the opposite impact.
 SHIFT IN THE BUSINESS
DEMAND FOR FUNDS
The U.S. government frequently borrows substantial
amounts of funds. Any shift in the government’s
borrowing behavior can affect the aggregate demand for
funds and affect the interest rate.
If the government reduces (instead of increases) the
amount that it borrows, there
will be a surplus of funds at the original interest rate,
which will result in a lower
interest rate.
HOW BANKING SERVICES FIT
WITHIN YOUR FINANCIAL PLAN
The key banking decisions for your
financial plan are:
-What banking service characteristics are
most important to you?
-What financial institution provides the
best banking service characteristic for
you?
GOAL FOR BANKING
SERVICES
1.Identify the most important
banking services.
2.Determine which financial
institution will provide me with
the best banking services.
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.
DECISIONS
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 minimumbalance,
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
HOW BANKING SERVICES
FIT WITHIN YOUR
FINANCIAL PLAN
What banking service characteristics are
most important to you?
- interest
What financial institution provides the best
banking service characteristics for you?
-CIMB BANK that provides 2.5% up to 4% of
interest rate