1 Slide 1 - Electronic Bank Service

But unlike some businesses, banks don’t manufacture products or extractnatural resources from the earth. Banks sell financial services such as car loans, home mortgageloans, business loans, checking accounts, credit card services, certificates of deposit, andindividual 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 actas go-betweens for people who save and people who want to borrow. If savers didn’t put theirmoney 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 thebank uses that money to make loans. The money doesn’t belong to the bank’s president, boardof directors, or stockholders. It belongs to you and the other depositors. That’s why bankershave 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 YouNeed a Bank?

Overview

• Purposes of Banks• Types of Financial Institutions• Safety of Financial Institutions• Privacy of Financial Institutions

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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 twoprincipal 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 ServiceBank types

4 BBS - Activity 2

ACTIVITY 2

The Many Servicesof 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where funds can be withdrawn by writing a check, using an ATM or debit card, or making personal withdrawals.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 Money can be withdrawn at any time.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’ ChecksDocuments 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.

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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.

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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 feesc) 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 accounts10. Check color and design11. Other? Slide 1 - Shopping Around

SHOPPINGAROUND

(THINGS TO ASK ABOUT WHENOPENING 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

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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% = $900Deposit 2- $900 - 10% = $810Deposit 3 - $810 - 10%= $729Money 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 4th deposit and using 10% as the reserve requirement.

Deposit 1- $15,000 = $13,500Deposit 2 -$13,500 = $12,150Deposit 3 -$12,150 = $10,935Deposit 4 -$ 10,935= $ 9841.50Total $46,426.50

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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 banksPrime rate = the rate banks charge their best and most reliable customers. Movement of this rate usually follows the discount rate

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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…

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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 1every six months – (semi-annually) expressed as .5every three months – (quarterly) expressed as .25and even once a month (monthly) expressed as 1/12 or .08333

I = P x R x T? = 2,200 x .045 x .75

Interest = $74.25At the end of 9 months, another 74.25 is added to the balance but interest is calculated on the original principal

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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 1every six months – (semi-annually) expressed as .5every three months – (quarterly) expressed as .25and even once a month (monthly) expressed as 1/12 or .08333

I = P x R x T? = 2,200 x .045 x .75

Interest = $74.25At the end of nine months interest is calculated on the accumulated balance and not the original principal …

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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 = $2,274.25 X .045 = $102.34

$2,274.25 + $102.34 = $2376.59 $2376.59 x .045 = $106.95 $2376.59 + $106.95 = $2483.54

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APR = annual percentage rate-the nominal rate on which interest is calculated per year

APY = annual percentage yieldrepresents the effects of compounding

… varies according to the APR and the frequency of compounding