Banking Today OBJ In this lesson, students will be able to identify important terms concerning banking. Students will be able to identify and/or define the following terms: Federal Reserve Principal Monetary Policy Interest Money Supply Default Liquidity Stocks & Bonds

There was a time when banks were not regulated by the Federal government. Some bankers made poor decisions that bankrupted their banks.

The Federal Reserve Bank December 23, 1913 : Provides the nation with a safer, more flexible, and more stable monetary and financial system.. 1. Monitor banking in the country and make sure that banks did not make too many loans. 2. Holds bankers to higher standards thereby protecting consumers.

The 12 Federal Banks monitors banking in every part of the United States.

The Fed The Federal Reserve Bank is commonly referred to as the “Fed.” The FED uses monetary policy to stimulate the economy by lowering interest rates Lower interest rates provide cheaper loans giving people more disposable income.

MONEY SUPPLY The money supply is all the money available in the United States.

Cash and Checks and Debit Cards They have liquidity. Liquidity means it can be used easily as money. E. Napp

BUT…These assets must be converted to cash before they are used. 2. Savings accounts and mutual funds, etc...are also part of the money supply. BUT…These assets must be converted to cash before they are used. E. Napp

Mortgages & Home Equity Loans LOAN: An amount of money that is given to someone for a period of time with a promise that it will be paid back with interest over a certain amount of time Types of Loans: Personal Loans Credit Cards Mortgages & Home Equity Loans Business Loans Student Loans

A mortgage is a loan on real estate. E. Napp

Principal and Interest There are two parts to any loan: principal and interest. The principal is the actual amount borrowed. The interest is the money a customer pays above the principal for the opportunity to borrow money. E. Napp

Interest When money is deposited in a bank, the customer receives interest on the money. A person who borrows money must pay interest.

Interest –Daily Interest Rate (DIR) The “daily” in “daily interest rate” means that interest accrues every day Let’s walk through the calculation to determine how much interest accrues in one day on a $10,000 loan with an interest rate of 4.66% (Interest Rate ÷ Days in Year) × Outstanding Principal Balance (0.0466 ÷ 365) × $10,000 = $1.27

DPR E. Napp

APR An annual percentage rate (APR) is the annual rate charged for borrowing or earned through an investment, and is expressed as a percentage that represents the actual yearly cost of funds over the term of a loan APR/365=DPR .0466/365=.000127671 DPR/Days in Billing cycle x Balance subject to interest=APR (.000127671X 30) X10000=38.30

APR

How Payments are Applied Fees Interest Principal $0 $38.83 $65.58 First payment on: $10,000 loan Interest rate: 4.66% Monthly payment amount: $104.41

Repayment Plan Summary John Smith has $35,000 in Direct Loan debt at an interest rate of 4.66%. His income is $30,000, he is single, and he lives in Indiana. His income increases at a rate of 5% per year. Repayment Plan Initial Payment Final Payment Total Paid Total Paid in Interest Total Time in Repayment Forgiveness 10-Year Standard $366 $43,934 $8,934 10 years - Graduated $206 $619 $46,212 $11,212 Extended $199 $59,561 $24,561 25 years Extended Graduated $137 $332 $65,102 $30,102 Income-Based $156 $53,706 $18,706 15 yr., 5. mo. $0 Pay As You Earn $104 $361 $50,699 $28,620 20 years $12,920 Income-Contingent $240 $315 $49,347 $14,347

Delinquency and Default Delinquency begins on the day after due date when full payment not made Loan servicers will begin activities to try to prevent default, including contacting references and sending notices Loan servicers always try to keep the borrower making payments because it will save the borrower time and interest payments in the long run Servicers will provide deferment and forbearance options if needed Default occurs after 270 days of delinquency

Default Default: When a person fails to pay back a loan. Defaulting on a loan leads to bad credit and higher interest rates in the future. By defaulting, a person ruins his reputation for repaying a loan. Bankruptcy: A legal declaration of an inability to pay debt.

Consequences of Default Reported to credit bureaus No more eligibility for federal student aid Loan immediately due and payable in full Lose eligibility for repayment plans and deferment or forbearance options Collection agencies will contact borrower Administrative wage garnishment Garnishment of tax refunds

Defaulting on a loan leads to bad credit and higher interest rates in the future.

Stocks, you own. Bonds, you loan.

Retirement Millennials — those born in the late 1990s — will need upwards of $2.5 million The youngest Millennials (born in the 1990’s) would need to save $1,000 a month for 48 years to accumulate $2.4 million. E. Napp

E. Napp

4. Bonds Bonds are loans. An investor loans money to a corporation or a government. The corporation or government must repay the loan with interest. E. Napp

This is a U.S. Savings Bond. When an investor buys this bond, he is loaning money to our Government. E. Napp

A bond must be converted to cash before it can be used. To receive all of the possible interest accrued on the bond, an investor must wait until the bond matures. E. Napp

Bonds and Risk Bonds are relatively safe investments. Due to the relative safety of bonds, investors do not make as much money investing in bonds as they do stocks. However, not all bonds are safe.

Types of Bonds U.S. Savings Bonds and U.S. Treasury Bonds-loan to the government. These are safest investments. Corporate Bond- loan to a corporation with the promise to pay back + interest.

Junk Bond is a highly risky bond issued from a failing corporation. Investors are more likely to lose their investments when they purchase junk bonds. However, if the company improves, the investor will make a huge profit.

4. Stocks When a person buys stock, he is buying partial ownership in a corporation. If the corporation prospers, the investor prospers. If the corporation fails, the investor can lose his investment. E. Napp

A stock certificate is a piece of paper that shows partial ownership in a corporation. E. Napp

Profiting from Stocks There are two ways a stock investor can profit from his stocks: Dividends: payments made by corporations to stockholders Capital Gain: selling a stock for more than its original purchase price

Capital Loss-an investor sells his stock for less than the original purchase price thus losing money.

The Markets Primary Markets – where stocks are created Secondary Markets – investors trade previously issued stocks The Stock Market Companies are not involved in the buying and selling of their stock.

Initial Public Offering (IPO) The first time a stock is sold to the public in the Primary Market Google IPO-$85 The stock has risen 1,294% since it went public on Aug. 19, 2004, meaning a $10,000 investment in Google at its IPO price would be worth $139,458.82 today.

The Exchanges Where Stocks are Bought and Sold New York Stock Exchange (NYSE) American Stock Exchange (AMEX) NASDAQ

Stock Markets Stocks can be purchased in the following stock markets: The New York Stock Exchange (NYSE): handles the most powerful and established companies NASDAQ-AMEX: handles mostly newer technology stocks

the most powerful and established companies. The New York Stock Exchange (NYSE) handles the most powerful and established companies.

The Indices (index) A collection of stocks—representative of the stock market Dow Jones – 30 most significant stocks in the stock market S&P 500 – 500 largest companies on the US stock market NASDAQ Composite – all stocks on the NASDAQ

The Dow Jones Industrial Average Stock performance is reported in the Dow Jones Industrial Average. The Dow Jones Industrial Average is usually referred to as the Dow. The Dow monitors and reports generally on the trading activities of thirty of the most powerful companies.

The Dow is either up or down. If the Dow is up: stocks are selling at higher prices. If the Dow is down: stocks are selling at lower prices.

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Bull and Bear Markets A bull market occurs when the stock market rises steadily over a period of time. A bear market occurs when the stock market falls over a period of time. Stock indexes, like the Dow, allow investors to track the progress of the stock market.

Investors love bull markets. But remember, what goes up, most come down.

While investors may not like bear markets because selling prices are low, bear markets are excellent times for buying shares at lower prices.

6. Taxes E. Napp

Tax A regressive tax is a tax where lower-income entities pay a higher fraction of their income in taxes than do higher-income entities. E. Napp

Examples of Regressive Taxes Sales Tax User Fees Property Tax

A progressive tax is a tax where lower-income entities pay a lower fraction of their income in taxes than do higher-income entities. E. Napp

2016 Federal Income Tax Rates

Paycheck calculator

A proportional tax (sometimes called a flat tax) is a tax where everyone, regardless of income, pays the same PERCENTAGE of income in taxes. E. Napp