1. Personal Finance Banking and Interest Rates
Bill Klinger

2. Personal Finance
Review
Exam

3. Depository Institutions
Commercial banks
Checking and savings accounts
Deposits insured up to $250k
Commercial and personal loans
Savings institutions
Similar to banks
Focus on personal loans
Credit unions
Non-profits
Serve members with some affiliation
Operate similar to commercial banks and savings institutions

4. Nondepository Institutions
Not federally insured
Finance companies
Focus on personal loans
Securities firms
Investment banking
E.g. Goldman Sachs, JP Morgan
Brokerage services
Insurance companies
Investment companies
E.g. Vanguard, Fidelity, Schwab

5. Banking Services Checking Credit cards Debit cards
Avoid fees
Choose the right bank
Pay on time
Watch your balance
Some checks you wrote may not have cleared
Do not count on ‘float’
Mobile apps
Credit cards
Debit cards
Safety deposit boxes
ATMs
Money order
Check paid in advance
Better than sending cash
Traveler’s checks

6. Choosing a Financial Institution
Convenience
Online bill paying
Interest rates
Fees

7. Interest Rates Risk-free rate Risk premium
Guaranteed rate, e.g. a CD
U.S. Treasury Bills considered risk-free asset
Risk premium
Pay more to take on more risk
Higher risk requires higher return
What is your risk propensity?
Term structure of interest rates
Risk premium to give up money for longer periods
The longer the time, the higher the interest rate
True for investments and loans

8. Interest Rates The longer the term, the higher the rate
Periods less than a year can be confusing
Compare rates using APR
Annual percentage rate
Rate you would earn if held for one year

9. Factors Affecting Interest Rates
Monetary policy
Federal Reserve (the Fed)
Controls money supply
More money, lower interest rates
Less money, higher interest rate
Fed sets interest rate for banks
Banks need to make money and charge higher interest
U.S. Government may need to borrow (Duh)
Increases money supply
When interest rates go up, the value of existing interest-paying investments goes down. Always.

10. In Class In groups of two
Financial Planning Problems, end of Chapter 5