Financial Institutions and Investments Personal Finance Financial Institutions and Investments

Financial Institutions

Banks v Credit Unions Credit Unions Commercial Banks Not for profit institution Owned by account holders Tend to offer better interest rates NCUA insured Commercial Banks For profit institution Owned by stockholders Earns money through charging interest FDIC insured

$250,000 FDIC? NCUA? NCUA National Credit Union Administration FDIC Insures deposits for member credit unions in case of failure FDIC Federal Depositors Insurance Corporation Insures deposits for member banks in case of failure $250,000

Credit Cards Loans Investments Services Offered CDs IRAs Checking Accounts Savings Accounts Loans Credit Cards Investments CDs IRAs

Investing

What is an investment? Money or property acquired for future income

Investment Types Savings Accounts: Includes: Bank Savings: Account for saving money   Certificates of Deposit (CDs): Savings account where money is locked in place until maturity date Individual Retirement Account: Retirement account that cannot be accessed until certain age   Low risk investments so low returns on investment

Investment Types Bonds: Loans to governments or corporations with a promise to pay back on certain date with interest   Lower risk investments so lower returns

Investment Types Mutual Funds: Mixed type of investment consisting of savings, bonds and stocks   Multiple investors combine funds to create larger investment pool Medium risk investments so medium level returns

Investment Types Stocks: Investment in a company that makes the investor part owner in the company   No protection of investment or guarantee of return Highest risk investments so highest potential returns – can also be highest losses depending upon invested amount

Risk? Return?

Risk? Risk The probability that your investment will suffer losses

Return? Return A yield (income earned) on an investment Ex. People investing in the stock market hope that the value of the stock will increase

Types of Returns Banks: Interest paid Bonds: Interest paid Stocks: increases in stock value or dividends (owner share of profits) Proceeds from sale of property or stock

Interest Simple Interest Interest is based on original loan or savings amount (principal) Formula: (PxR)T Ex: Mortgage loans where a borrower pays interest only on the amount borrowed.

You give $100 to a bank They pay you 5% simple interest per year. After one year you will have $105. ((100*.05)*1) After two years you will have $110. Each year earns $5 in interest

You deposit $1000 into a bank account paying 7% simple interest per year. You left the money in for 3 years. (1000 *.07)*3 = $210

You deposit $12000 into a bank account paying 1 You deposit $12000 into a bank account paying 1.5% simple interest per month. You left the money in for 2 years. (12000*.015)*2 = $360

Interest Compound Interest Interest is based on current amount owed or saved (principal and any previous interest earned) I.E. you earn interest on old interest (money grows faster this way!)

Formula: Principal x {(Annual interest rate ÷ 100) + 1}^number of years. For example, $1,000 at an annual compound interest rate of 10 percent will, in 5 years, be: 1000 x {(10 ÷ 100) + 1}^5 = $1,6105.51.