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Banking Today OBJ
In this lesson, students will be able to identify
important terms concerning banking.
Students will be able to identify and/or define
the following terms:
Federal Reserve
Monetary Policy
Money Supply
Liquidity
Principal
Interest
Default
Stocks & Bonds
There was a time when banks were not
regulated by the Federal government.
Some bankers made poor decisions
that bankrupted their banks.
The Federal Reserve Bank
• December 23, 1913 : Provides the nation with a
safer, more flexible, and more stable monetary
and financial system..
1. Monitor banking in the country and make sure
that banks did not make too many loans.
2. Holds bankers to higher standards thereby
protecting consumers.
The 12 Federal Banks monitors
banking in every part of the United
States.
The Fed
• The Federal Reserve Bank is commonly
referred to as the “Fed.”
• The FED uses monetary
policy to stimulate the
economy by lowering
interest rates
• Lower interest rates provide cheaper loans
giving people more disposable income.
MONEY SUPPLY
The money supply is all the money
available in the United States.
1. Cash and Checks and Debit Cards
They have liquidity.
Liquidity means it can be used easily as
money.
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2. Savings accounts and mutual funds,
etc...are also part of the money supply.
• BUT…These assets must be converted to
cash before they are used.
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3. LOANS
LOAN:
An amount of money that is given to
someone for a period of time with a promise that
it will be paid back with interest over a certain
amount of time
Types of Loans:
Personal Loans
Credit Cards
Mortgages & Home Equity Loans
Business Loans
Student Loans
A mortgage is a loan on real estate.
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Principal and Interest
• There are two parts to any loan: principal
and interest.
• The principal is the actual amount
borrowed.
• The interest is the money a customer
pays above the principal for the
opportunity to borrow money.
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Interest
• When money is deposited in a bank, the
customer receives interest on the money.
• A person who borrows money must pay
interest.
Interest –Daily Interest Rate
(DIR)
• The “daily” in “daily interest rate” means that interest
accrues every day
• Let’s walk through the calculation to determine how
much interest accrues in one day on a $10,000 loan with
an interest rate of 4.66%
(Interest Rate ÷ Days in Year) × Outstanding Principal Balance
(0.0466 ÷ 365) × $10,000 = $1.27
DPR
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APR
• An annual percentage rate (APR) is the annual rate charged
for borrowing or earned through an investment, and is
expressed as a percentage that represents the actual yearly
cost of funds over the term of a loan
• APR/365=DPR
.0466/365=.000127671
• DPR/Days in Billing cycle x Balance subject to interest=APR
• (.000127671X 30) X10000=38.30
APR
How Payments are Applied
First payment on:
Fees
• $10,000 loan
Interest
Principal
• Interest rate:
4.66%
• Monthly payment
amount: $104.41
$0
$38.83
$65.58
Repayment Plan Summary
John Smith has $35,000 in Direct Loan debt at an interest rate of 4.66%.
His income is $30,000, he is single, and he lives in Indiana. His
income increases at a rate of 5% per
year.
Repayment
Plan
Initial
Payment
Final
Payment
Total
Paid
Total Paid in
Interest
Total Time in
Repayment
Forgiveness
10-Year
Standard
$366
$366
$43,934
$8,934
10 years
-
Graduated
$206
$619
$46,212
$11,212
10 years
-
Extended
$199
$199
$59,561
$24,561
25 years
-
Extended
Graduated
$137
$332
$65,102
$30,102
25 years
-
Income-Based
$156
$366
$53,706
$18,706
15 yr., 5. mo.
$0
Pay As You
Earn
$104
$361
$50,699
$28,620
20 years
$12,920
IncomeContingent
$240
$315
$49,347
$14,347
15 yr., 5. mo.
$0
Delinquency and Default
• Delinquency begins on the day after due date when full
payment not made
• Loan servicers will begin activities to try to prevent
default, including contacting references and sending
notices
• Loan servicers always try to keep the borrower making
payments because it will save the borrower time and
interest payments in the long run
• Servicers will provide deferment and forbearance options
if needed
• Default occurs after 270 days of delinquency
Default
Default: When a person fails to pay back a
loan.
• Defaulting on a loan leads to bad credit
and higher interest rates in the future.
• By defaulting, a person ruins his reputation
for repaying a loan.
•
•
•
Bankruptcy: A legal
declaration of an inability
to pay debt.
Consequences of Default
Reported to credit bureaus
No more eligibility for federal student aid
Loan immediately due and payable in full
Lose eligibility for repayment plans and deferment or forbearance options
Collection agencies will contact borrower
Administrative wage garnishment
Garnishment of tax refunds
Defaulting on a loan leads to bad credit
and higher interest rates in the future.
Stocks,
you own.
Bonds,
you
loan.
Retirement
• Millennials — those born in the late 1990s
— will need upwards of $2.5 million
• The youngest Millennials (born in the
1990’s) would need to save $1,000 a
month for 48 years to accumulate $2.4
million.
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4. Bonds
• Bonds are loans.
• An investor loans money to a corporation or
a government.
• The corporation or government must repay
the loan with interest.
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This is a U.S. Savings Bond. When an
investor buys this bond, he is loaning money
to our Government.
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A bond must be converted to cash
before it can be used.
To receive all of the possible interest
accrued on the bond, an investor must wait
until the bond matures.
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Bonds and Risk
• Bonds are relatively safe investments.
• Due to the relative safety of bonds, investors do
not make as much money investing in bonds as
they do stocks.
• However, not all bonds are safe.
Types of Bonds
U.S. Savings Bonds and U.S. Treasury
Bonds-loan to the government.
• These are safest investments.
Corporate Bond- loan to a corporation with
the promise to pay back + interest.
Junk Bond is a highly risky bond issued from
a failing corporation.
Investors are more likely to lose their
investments when they purchase junk bonds.
However, if the company improves, the investor
will make a huge profit.
4. Stocks
• When a person buys stock, he is buying
partial ownership in a corporation.
• If the corporation prospers, the investor
prospers.
• If the corporation fails, the investor can
lose his investment.
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A stock certificate is a piece of paper that shows
partial ownership in a corporation.
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Profiting from Stocks
• There are two ways a stock investor can
profit from his stocks:
Dividends: payments
made by corporations to
stockholders
Capital Gain: selling a stock for more than
its original purchase price
Capital Loss-an investor sells his stock for
less than the original purchase price thus
losing money.
The Markets
• Primary Markets – where stocks are
created
• Secondary Markets – investors trade
previously issued stocks
– The Stock Market
• Companies are not involved in the buying
and selling of their stock.
Initial Public Offering (IPO)
• The first time a stock is sold to the public in
the Primary Market
• Google IPO-$85
The stock has risen 1,294%
since it went public on Aug. 19,
2004, meaning a $10,000
investment in Google at its IPO
price would be worth $139,458.82
today.
The Exchanges
• Where Stocks are Bought and Sold
– New York Stock Exchange (NYSE)
– American Stock Exchange (AMEX)
– NASDAQ
Stock Markets
• Stocks can be purchased in the following
stock markets:
The New York Stock Exchange (NYSE):
handles the most powerful and established
companies
NASDAQ-AMEX: handles mostly newer
technology stocks
The New York Stock Exchange (NYSE) handles
the most powerful and established companies.
The Indices (index)
• A collection of stocks—representative of
the stock market
– Dow Jones – 30 most significant stocks in the
stock market
– S&P 500 – 500 largest companies on the US
stock market
– NASDAQ Composite – all stocks on the
NASDAQ
The Dow Jones Industrial Average
• Stock performance is reported in the Dow
Jones Industrial Average.
• The Dow Jones Industrial Average is
usually referred to as the Dow.
• The Dow monitors and reports generally
on the trading activities of thirty of the
most powerful companies.
The Dow is either
up or down.
If the Dow is up:
stocks are selling at
higher prices.
If the Dow is down:
stocks are selling at
lower prices.
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Reserved. May not be scanned,
Bull and Bear Markets
• A bull market occurs when the stock
market rises steadily over a period of time.
• A bear market occurs when the stock
market falls over a period of time.
• Stock indexes, like the Dow, allow
investors to track the progress of the
stock market.
Investors love bull markets. But remember,
what goes up, most come down.
While investors may not like bear markets
because selling prices are low, bear markets
are excellent times for buying shares at lower
prices.
6. Taxes
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Tax
• A regressive tax is a tax where lowerincome entities pay a higher fraction of
their income in taxes than do higherincome entities.
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Examples of Regressive Taxes
• Sales Tax
• User Fees
• Property Tax
• A progressive tax is a tax where lowerincome entities pay a lower fraction of their
income in taxes than do higher-income
entities.
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2016 Federal Income Tax Rates
• Paycheck calculator
• A proportional tax (sometimes called a flat
tax) is a tax where everyone, regardless of
income, pays the same PERCENTAGE of
income in taxes.
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