Post on 20-Dec-2015
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ChapterChapterChapterChapter
Financial InstitutionsFinancial Institutions
9
Chapter ObjectivesChapter ObjectivesStudents will learn: Basic functions of financial service
institutions Basic functions of financial intermediaries Basic properties of stocks and bonds
Students will learn: Basic functions of financial service
institutions Basic functions of financial intermediaries Basic properties of stocks and bonds
Financial Service Institutions Financial Service Institutions
Inte
rest
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Interest
Interest
Interest
B
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Can you think of any other
types of borrowers?
Business GrowthBusiness GrowthProfits vs. Lending
Savings is investing
Capital investments = economic growth
Profits vs. Lending
Savings is investing
Capital investments = economic growth
Banking ProductsBanking Products Keeping Money Safe (insurance, FDIC) Transferring Funds (portability, access) Loaning Money (interest, investing)
Keeping Money Safe (insurance, FDIC) Transferring Funds (portability, access) Loaning Money (interest, investing)
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Certificate of Deposit -CDCertificate of Deposit -CD Promissory note issued by a bankPromissory note issued by a bank
Time deposit that restricts holders from Time deposit that restricts holders from withdrawing funds on demand which is how withdrawing funds on demand which is how you earn more you earn more INTERESTINTEREST on your money on your money
Early withdrawal will often incur a penaltyEarly withdrawal will often incur a penalty
Purchase a $10,000 CD with an interest of 5% compounded 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 annually and a term of one year. At year's end, the CD will
have grown to $10,500have grown to $10,500
Promissory note issued by a bankPromissory note issued by a bank
Time deposit that restricts holders from Time deposit that restricts holders from withdrawing funds on demand which is how withdrawing funds on demand which is how you earn more you earn more INTERESTINTEREST on your money on your money
Early withdrawal will often incur a penaltyEarly withdrawal will often incur a penalty
Purchase a $10,000 CD with an interest of 5% compounded 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 annually and a term of one year. At year's end, the CD will
have grown to $10,500have grown to $10,500
Federal Deposit Insurance Corporation - FDIC
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
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
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Financial intermediaries are institutions that help channel funds from savers to borrowers.
Banks, Savings and Loan Associations, and Credit UnionsTake in deposits from savers and then lend some of these funds to various businesses
Finance CompaniesMake loans to consumers and small businesses, but charge borrowers higher fees and interest rates to cover possible losses
Mutual FundsA 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 CompaniesProvide financial protection to the family, or other beneficiaries, of the insured when the customer pays annual PREMIUM. (bill)
Pension FundsAre set up by employers to collect deposits and distribute payments to retirees
Financial IntermediariesFinancial Intermediaries
Financial intermediaries accept funds from savers and make loans to investors.
Financial Intermediaries
Commercial banksSavings & loan associations
Savings banksMutual savings banks
Credit unions
Financial Institutions that make loans to…
Life insurance companiesMutual funds
Pension fundsFinance companies
InvestorsSavers make deposits to…
The Flow of Savings and InvestmentsThe Flow of Savings and Investments
stocks and bondsstocks and bondsPrimary Primary MarketMarket
Secondary Secondary MarketMarket
Securities Securities MarketMarket
OTC OTC MarketMarket
BONDS
STOCKS
Stock ExchangesStock ExchangesStock ExchangesStock ExchangesThe 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.
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.
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Stock ExchangesStock ExchangesStock ExchangesStock 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.
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.
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Stock Performance IndexesStock 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.
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.
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What are Five Types of Bonds?What are Five Types of Bonds?
Chapter 11, Section 2Chapter 11, Section 23311
Savings BondsSavings bonds are low-denomination ($50 to $10,000) bonds issued bythe United States government. Savings bonds are purchased below parvalue (a $100 savings bond costs $50 to buy) and interest is paid only
when the bond matures.Treasury Bonds, Bills, and Notes
These investments are issued by theUnited States Treasury Department.
Municipal BondsMunicipal bonds are issued by
state or local governments to financesuch improvements as highways,
state buildings, libraries, andschools.
Corporate BondsA corporate bond is a bond that a
corporation issues to raise money toexpand its business.
Junk BondsJunk bonds are lower-rated,
potentially higher-paying bonds.
U.S. Savings BondsU.S. Savings BondsU.S. Savings BondsU.S. Savings Bonds
bond that offers a fixed rate of interest over a bond that offers a fixed rate of interest over a fixed period of timefixed period of time
attractive because they are not subject to state attractive because they are not subject to state or local income taxesor local income taxes
one of the safest types of investments one of the safest types of investments because they are endorsed by the federal because they are endorsed by the federal government government
Borrowing directly from saversBorrowing directly from savers
bond that offers a fixed rate of interest over a bond that offers a fixed rate of interest over a fixed period of timefixed period of time
attractive because they are not subject to state attractive because they are not subject to state or local income taxesor local income taxes
one of the safest types of investments one of the safest types of investments because they are endorsed by the federal because they are endorsed by the federal government government
Borrowing directly from saversBorrowing directly from savers
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Money Market & Mutual FundsMoney Market & Mutual Funds
Chapter 11, Section 2Chapter 11, Section 233
11
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.
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.
States of the MarketStates of the Market
Bull Market Bear Market
The Bull vs. The BearThe 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.
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.
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RISKRISK 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
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
EquitiesEquitiesEquitiesEquities stock or any other security
representing an ownership interest in a corporation
stock or any other security representing an ownership interest in a corporation
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FuturesFuturesFuturesFutures
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
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
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OptionsOptionsOptionsOptions 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)
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)
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