1 Slide 1 - Electronic Bank Service But unlike some businesses, banks don’t manufacture products or extract natural resources from the earth. Banks sell financial services such as car loans, home mortgage loans, business loans, checking accounts, credit card services, certificates of deposit, and individual retirement accounts. Some people go to banks in search of a safe place to keep their money. Others are seeking to borrow money to buy a house or a car, start a business, expand a farm, pay for college, or do other things that require borrowing money. Where do banks get the money to lend? They get it from people who open accounts. Banks act as go-betweens for people who save and people who want to borrow. If savers didn’t put their money in banks, the banks would have little or no money to lend. Your savings are combined with the savings of others to form a big pool of money, and the bank uses that money to make loans. The money doesn’t belong to the bank’s president, board of directors, or stockholders. It belongs to you and the other depositors. That’s why bankers have a special obligation not to take big risks when they make loans. What is a bank? A bank is a business.

2 BBS - Activity 1 ACTIVITY 1 Why Do You Need a Bank? Overview Purposes of Banks Types of Financial Institutions Safety of Financial Institutions Privacy of Financial Institutions

3 Commercial banking, based on the fractional reserve system, has an ancient origin. The system allows a bank to keep a percentage of the money on reserve and use the remaining amount to make loans. Therefore, the two principal functions of today’s commercial banks are to oversee deposits (suchas checking and savings) and lend money. Their income comes from interest on loans, investments, and various service charges. Slide 1 - Electronic Bank Service Bank types

4 BBS - Activity 2 ACTIVITY 2 The Many Services of a Bank Overview Identify financial services provided by a bank. Decide on services of personal benefit. Recognize the impact of state and federal regulations upon the security of a bank.

Bank Checking account TRADITIONAL BANK SERVICES DESCRIPTION where funds can be withdrawn by writing a check, using an ATM or debit card, or making personal withdrawals. Bank Savings account where money usually remains for a account long period of time. Interest is earned on the account. Money can be withdrawn at any time. Loans A sum of money borrowed from a financial institution at an agreed rate of interest. Cashier’s Checks A check issued by a bank, drawn on its own funds and signed by the cashier. Money Remittance (Wire Transfer) Process of moving money from one bank to another, sometimes between countries. Travelers’ Checks Documents that function as cash. Can be replaced if lost or stolen. Often used when traveling to other countries. Safe Deposit Box Locked box rented in a secure area of the bank. A place to store valuables.

6 BANK CARD TYPES Slide 2 - Bank Card Types TYPE Check Cards or Debit Cards Stored Value Cards DESCRIPTION Bank cards that allow for the payment of goods and services to be subtracted directly from a bank account. Can be used with merchants that take major credit cards—known as point of sale (POS) transactions. Bank cards with preset, limited value. Used to pay for goods and services. Alternative to cash.

7 1.Location of the bank 2.Location of ATMs 3.Banking hours 4.Fees associated with the checking account: How many? How much? When? Some account fees may include: a) Non-primary bank ATM transactions b) In-branch transaction fees c) Per-check fees 5.Available overdraft protection 6.Cost of checks 7.Minimum balance required 8.Minimum transactions or limits 9.If they have interest-bearing accounts 10.Check color and design 11.Other? Slide 1 - Shopping Around SHOPPING AROUND (THINGS TO ASK ABOUT WHEN OPENING A CHECKING ACCOUNT) AREAS OF INTEREST Opening an account

8 Slide 2 - Commonly Accepted Forms of ID Excess reserves any other resources a bank uses to create money through business transactions Deposits and Reserves Primary Reserves Cash on hand Deposits due from other banks Reserve requirement Secondary reserves Securities purchased from Fed Banks create money through the multiplier effect

9 The Multiplier effect Money on deposit, minus the reserve requirement, can be loaned out to customers as loans and create more deposits. You deposit $1,000 The bank holds back 10% reserve $900 can be loaned out That $900 is used to buy something and the seller deposits $900 in another bank Of the $900 deposit, the bank must reserve 10% $810 is available to be loaned out Deposit 1- $1,000 – 10% = $900 Deposit 2- $ % = $810 Deposit 3 - $ %= $729 Money created$2439

10 Slide 1 - Writing a Check Try this one Remember ….Deposit – Reserve = New Deposit How much money is created from a deposit of $15,000, after the 4 th deposit and using 10% as the reserve requirement. Deposit 1- $15,000 = $13,500 Deposit 2 -$13,500 = $12,150 Deposit 3 -$12,150 = $10,935 Deposit 4 -$ 10,935= $ Total $46,426.50

11 Factors affecting Interest Rates and Business How well do you remember? Market forces determine most interest rates Economic conditions Cost of money … controlled by the Fed’s monetary policy Federal funds rate = the amount of interest charged for short-term, interbank loans Discount rate = the interest rate the fed sets and charges for loans to member banks Prime rate = the rate banks charge their best and most reliable customers. Movement of this rate usually follows the discount rate

12 Calculating Simple Interest Interest = the price paid for the use of money To calculate simple interest… The original amount or Principal X Rate charged X Time I = P x R x T If you borrowed $4500 for a period of six months at a rate of 8% How much is the interest you will pay? Try it…

13 Interest-bearing Accounts Interest = the price paid for the use of money To calculate simple interest earned on a savings account with 2,200, in nine months, with an interest rate that pays 4-1/2 percent… Banks calculate interest they pay, on some fixed interval: once a year – (annually) expressed as 1 every six months – (semi-annually) expressed as.5 every three months – (quarterly) expressed as.25 and even once a month (monthly) expressed as 1/12 or I = P x R x T ? = 2,200 x.045 x.75 Interest = $74.25 At the end of 9 months, another is added to the balance but interest is calculated on the original principal

14 Interest-bearing Accounts Interest = the price paid for the use of money To calculate compound interest earned on a savings account with 2,200, in nine months, with an interest rate that pays 4-1/2 percent… Banks calculate interest they pay, on some fixed interval: once a year – (annually) expressed as 1 every six months – (semi-annually) expressed as.5 every three months – (quarterly) expressed as.25 and even once a month (monthly) expressed as 1/12 or I = P x R x T ? = 2,200 x.045 x.75 Interest = $74.25 At the end of nine months interest is calculated on the accumulated balance and not the original principal …

15 Interest-bearing Accounts COMPOUND INTEREST I = P x R x T ? = 2,200 x.045 x.75 Interest = $74.25 At the end of nine months interest is calculated on the accumulated balance and not the original principal … Balance = $2, X.045 = $ $2, $ = $ $ x.045 = $ $ $ = $

16 APR = annual percentage rate -the nominal rate on which interest is calculated per year APY = annual percentage yield represents the effects of compounding … varies according to the APR and the frequency of compounding