Lesson 5 Banking - PowerPoint - Duke

Banking and You!

Why do you put your money in a bank?

1) They store our money

2) They are safe

3) They are convenient

4) They pay interest

5) They are FDIC insured

What is FDIC?

FDIC – Federal Deposit Insurance Corporation

- Created in 1933.

- Insures individual deposits up to $250,000.

NOT FDIC INSURED!

What do banks do?

Banks and Financial Institutions are essential for managing the money supply.

-They save and store our money.

-They loan money to businesses, and individuals.

-They are also businesses/profit seeking firms.

Save Money

You can chose to save your money different ways:

1. Savings Account

2. Checking Account

3. Money Marketing Account

4. Certificate of Deposit (CD)

Saving and Checking Accounts

- These are the most common forms of savings.

- People withdraw from them most frequently.

- They accrue less interest than money markets or CDs.

Money Markets and CDs

- Special kinds of saving accounts.

- They pay higher interest rates.

Money Markets

- Interest rates can vary

(go up or down)

- Allows you to save

- You are able to write a limited number of checks

Certificate of Deposit (CDs)

- A guaranteed rate of interest

-Must remain in the account for

a specified amount of time

-Cannot be removed without

penalty

How to make money while you save money:

Save money- Pay % interest to depositor.

-simple interest = Interest paid only on principal.

-compound interest = Interest paid on both principal and accumulated interest.

Simple and Compound Interest

Simple Interest:

Compound Interest:

I = PRT

Invested at 5%

Interest

Compound

Simple Difference

Start 5,000 5,000 0

After Year 1 5,250 5,250 0

After Year 2 5,512.50 5,500 12.50

After Year 3 5,788.13 5,750 38.13

After Year 4 6,077.53 6,000 77.53

After Year 5 6,381.41 6,250 131.41

Compound Interest: Rule of 72

Rule of 72:

The rule says that to find the number of years required to double your money at a given interest rate, you just divide the interest rate into 72.

Example:

How long will it take to double your money at 8% interest?

Divide 8 into 72 = 9 years

Let’s Go to the Bank!

Suppose you are a customer depositing $10,000 in the bank. Looking at the information on your depositor’s slip, figure out the rate of return at 1, 10 & 20 years.

Let’s Go to the Bank!

Year 1

Year 10

Year 20

B of A at a rate of 2%

Chase at a rate of 1.5%

Bank of meAt a rate of 10%

$11,000

$20,000

$30,000

Making bank at the bank

How far did your 10K go?

B of A at a rate of 2%

Chase at a rate of 1.5%

Schools/Student’s First at a rate

of .5%

Year 1

Year 10

Year 20

$10,200 $ 10,150 $ 10,050

$12,000 $ 11,500 $ 10,500

$14,000 $ 13,000 $ 11,000

Fractional Banking

Most banks practice Fractional Reserve Banking.

Fractional Reserve Banking: The banks keep a fraction of your deposit and loans out the rest.

ex. businesses seek loans to grow, this money comes from other people’s deposits.

Fractional Reserve Banking

Deposit

“Money In”

$100.00

Loan

“Money Out”

$70.00

Banks keep 30% of your deposit in reserves and

invest the rest to make $

Other Ways Banks Make Money

- Fees: ATM, Checking, Savings, Credit Cards

- Interest charged to borrowers = They charge you interest for borrowing “their” money. Loans are the largest source of income for banks.

*Banks are business/profit seeking firms

so loans are use to make them money!

So you need money?

You are borrowing $20,000 from the bank to buy a car. Looking at the information on your borrower’s slip, figure out the cost of borrowing based on your credit score.

B of A 8 % 2.6% 1%

Chase 9% 3% 1.2%

Students First 11% 3.5% 2.5%

FICO Score 100 – 549

FICO Score 600 – 741

FICO Score 750 - 850

The Real Price

B of A

Chase

Students First

FICO Score FICO Score FICO SCORE 100 – 599 600 – 741 750 - 850

$ 21,600

$ 20,520 $ 20,200

$ 21,800 $ 20,600 $ 20,240

$ 22,200 $ 20,700 $ 20,500