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

S

A

V

E

R

S

Interest

Interest

Interest

B

O

R

R

O

W

E

R

S

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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