Banks, the Fed & Popular Types of Investments

What is a BANK?What is a NATIONAL BANK?

A BANK is an institution for receiving, keeping, and lending money

A NATIONAL BANK is a bank that is chartered or licensed by the national government

Why is it important you save your money in a bank?

Your money stays safe You are less likely to waste it Your money is documented Your money grows with interest Your money provides loans to people

in your community and around the country

What is INTEREST and why do you earn or get charged it?

Interest is money paid to borrow money

Interest is money earned for saving money

Banks pay interest to entice you to save

Banks charge interest to earn their own money by lending

Simple vs. Compound Interest

Principal = Amount of money borrowed

Simple Interest = interest paid only on principal

Compound Interest = interest paiid on both principal and accumulated interested

***See Next Slide

Let’s say the interest rate is

5%

InterestRate

Loanable Funds ($billions)

Demand

Supply

5%

60

LOANABLE FUNDS GRAPH

When interest rates are HIGH, people savemore and borrow less

When interest rates are LOW, people saveless and borrow more

Fractional Reserve System A banking system that

keeps only a fraction of funds on hand and lends out the remainder

The Reserve Ratio (R) is 10% today

This means if you deposit $10 into the bank, $1 is put in the vault and the other $9 is lent out

The Federal Reserve System(Central Banking System)

The Federal Reserve (FED) is the biggest bank in the USA ran by the Federal Government

The FED watches over all smaller banks The FED keeps banks supplied with money

if in need The FED controls (prints/coins $) the money

supply therefore they regulate $ value The FED designs and regulates loan

structures and rules The FED clears checks (oks written checks) The FED decides INTEREST RATES The Federal Deposit Insurance

Company (FDIC) insures your deposits up to $250,000 today

Created in 1913 by the Federal Reserve Act TIP: You should join a FDIC insured bank…

watch it…some are not insured by the Federal Govt!!!!

The Structure of the Fed

The Federal Reserve System consists of:

Board of Governors (7 members), located in Washington, DC

12 regional Fed banks, located around the U.S.

Federal Open Market Committee (FOMC), includes the Bd of Govs and presidents of some of the regional Fed banks The FOMC decides monetary policy.

Alan Greenspan Chair of FOMC,

Aug 1987 – Jan 2006

BEN

BERNANKE(Current)

THE FED DISTRICTS

You are in DISTRICT 7 and your main bank is located in CHICAGO And there is a branch bank in DETROIT

Top 10 Common Investments

1. Savings & Checking

Two most common ways of saving Pays the smallest interest out of most

common investments Checking pays lower interest because

money is moving…not sitting When you write checks or use your

debit card, money comes out of your CHECKING account

2. Stocks You know what stocks are Private Stock = Only family members or selected

people can buy Public Stock = Anybody can buy Common Stock = You don’t get your money back if

company goes bankrupt, but you can vote on company happenings

Preferred Stock = You may get your money back if company goes bankrupt, however, you have no voting rights in company happenings

IPO’s (Initial Public Offering..when a company first issues stock)

Stock Splits

3. Bonds Debt security…Its like a loan 1. PAR VALUE = Face Value 2. COUPON RATE = Interest rate 3. MATURITY = How long you have to wait until it

reaches full value BOND RATINGS (Standard & Poors, Moodys, Fitch) There are several types on bonds: Corporate,

Savings, Government, Municipal, School… RULE OF THUMB: Longer the term, the higher

the interest…riskier the bond, higher the interest

4. Mutual Funds A mutual fund is a professionally managed type of

collective investment scheme that pools money from many investors and invests it in stocks, bonds, short-term money market instruments, and/or other securities.

The mutual fund will have a fund manager that trades the pooled money on a regular basis. The net proceeds or losses are then typically distributed to the investors annually.

RULE OF THUMB – the more you put in and the longer you invest…the more you make…a LONG TERM investment

5. Money Market Accounts A money market account is a type of savings

account offered by banks and credit unions just like regular savings accounts. The difference is that they usually pay higher interest, have higher minimum balance requirements (sometimes $1000-$ 2500), and only allow three to six withdrawals per month.

Another difference is that, similar to a checking account, many money market accounts will let you write up to three checks each month.

6. Certificate Of Deposit (CDs)

Like a savings account and a bond You must agree to keep your money

in an account for a certain period of time

Can’t withdraw early RULE OF THUMB: Longer you

keep it in, higher interest you get

7. IRA accounts

Individual Retirement Account Info, Info, Info 401k = Retirement savings for

private employees 403b = Retirement savings for

government employees

8. ANNUITIES

You pay fixed payments to a life insurance company over many years

Tax deferred – you are not taxed until it is withdrawn

When you retire or die, you or the people you choose receive fixed monthly payments

9. Pensions

An arrangement to provide people with an income when they are no longer earning a regular income from employment.

You pay in each paycheck over your career

You receive a monthly paycheck when you retire

10. 529 accounts

A 529 Plan is an education savings plan operated by a state or educational institution designed to help families set aside funds for future college costs

Higher interest because money is put in for 18 years or more