1. Banks, the Fed & Popular Types of Investments

2. What is a BANK? What is a NATIONAL BANK ?  A BANK is an institution for receiving, keeping, and lending money  A NATIONAL BANK is a bank that is chartered or licensed by the national government

3. Why is it important you save your money in a bank?  Your money stays safe  You are less likely to waste it  Your money is documented  Your money grows with interest  Your money provides loans to people in your community and around the country

4. What is INTEREST and why do you earn or get charged it?  Interest is money paid to borrow money  Interest is money earned for saving money  Banks pay interest to entice you to save  Banks charge interest to earn their own money by lending

5. Simple vs. Compound Interest  Principal = Amount of money borrowed  Simple Interest = interest paid only on principal  Compound Interest = interest paiid on both principal and accumulated interested ***See Next Slide

6. Let’s say the interest rate is 5%

7. Interest Rate Loanable Funds ($billions) Demand Supply 5% 60 LOANABLE FUNDS GRAPH When interest rates are HIGH, people save more and borrow less When interest rates are LOW, people save less and borrow more

8. Fractional Reserve System  A banking system that keeps only a fraction of funds on hand and lends out the remainder  The Reserve Ratio (R) is 10% today  This means if you deposit $10 into the bank, $1 is put in the vault and the other $9 is lent out

9. The Federal Reserve System (Central Banking System)  The Federal Reserve (FED) is the biggest bank in the USA ran by the Federal Government  The FED watches over all smaller banks  The FED keeps banks supplied with money if in need  The FED controls (prints/coins $) the money supply therefore they regulate $ value  The FED designs and regulates loan structures and rules  The FED clears checks (oks written checks)  The FED decides INTEREST RATES  The Federal Deposit Insurance Company (FDIC) insures your deposits up to $250,000 today  Created in 1913 by the Federal Reserve Act  TIP: You should join a FDIC insured bank…watch it…some are not insured by the Federal Govt!!!!

10. The Structure of the Fed The Federal Reserve System consists of: Board of Governors (7 members), located in Washington, DC 12 regional Fed banks, located around the U.S. Federal Open Market Committee (FOMC), includes the Bd of Govs and presidents of some of the regional Fed banks The FOMC decides monetary policy. Alan Greenspan Chair of FOMC, Aug 19 87 – Jan 2006 BEN BERNANKE (Current)

11. THE FED DISTRICTS You are in DISTRICT 7 and your main bank is located in CHICAGO And there is a branch bank in DETROIT

12. Top 10 Common Investments

13. 1. Savings & Checking  Two most common ways of saving  Pays the smallest interest out of most common investments  Checking pays lower interest because money is moving…not sitting  When you write checks or use your debit card, money comes out of your CHECKING account

14. 2. Stocks  You know what stocks are  Private Stock = Only family members or selected people can buy  Public Stock = Anybody can buy  Common Stock = You don’t get your money back if company goes bankrupt, but you can vote on company happenings  Preferred Stock = You may get your money back if company goes bankrupt, however, you have no voting rights in company happenings  IPO’s (Initial Public Offering..when a company first issues stock) IPO’s  Stock Splits

15. 3. Bonds  Debt security…Its like a loan  1. PAR VALUE = Face Value  2. COUPON RATE = Interest rate  3. MATURITY = How long you have to wait until it reaches full value  BOND RATINGS (Standard & Poors, Moodys, Fitch) BOND RATINGS  There are several types on bonds: Corporate, Savings, Government, Municipal, School…  RULE OF THUMB: Longer the term, the higher the interest…riskier the bond, higher the interest

16. 4. Mutual Funds  A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors and invests it in stocks, bonds, short- term money market instruments, and/or other securities.stocksbondsmoney market securities  The mutual fund will have a fund manager that trades the pooled money on a regular basis. The net proceeds or losses are then typically distributed to the investors annually.fund managertrades  RULE OF THUMB – the more you put in and the longer you invest…the more you make…a LONG TERM investment

17. 5. Money Market Accounts  A money market account is a type of savings account offered by banks and credit unions just like regular savings accounts. The difference is that they usually pay higher interest, have higher minimum balance requirements (sometimes $1000-$­2500), and only allow three to six withdrawals per month.bankscredit unionsinterest  Another difference is that, similar to a checking account, many money market accounts will let you write up to three checks each month.

18. 6. Certificate Of Deposit (CDs)  Like a savings account and a bond  You must agree to keep your money in an account for a certain period of time  Can’t withdraw early  RULE OF THUMB: Longer you keep it in, higher interest you get

19. 7. IRA accounts  Individual Retirement Account  Info, Info, Info Info, Info, Info  401k = Retirement savings for private employees  403b = Retirement savings for government employees

20. 8. ANNUITIES  You pay fixed payments to a life insurance company over many years  Tax deferred – you are not taxed until it is withdrawn  When you retire or die, you or the people you choose receive fixed monthly payments

21. 9. Pensions  An arrangement to provide people with an income when they are no longer earning a regular income from employment.  You pay in each paycheck over your career  You receive a monthly paycheck when you retire

22. 10. 529 accounts  A 529 Plan is an education savings plan operated by a state or educational institution designed to help families set aside funds for future college costs  Higher interest because money is put in for 18 years or more