PFP Chapter 5

interest rates

- will be higher for loans that are exposed to higher default risk. will vary among loans. Higher rates of interest are changes on loans that are exposed to higher default risk.

The organization that controls mentary policy in the Unites States is

Federal Reserve System, The central bank of the U.S.

Saving institutions

accept deposits but focus on providing mortgage and personal loans to individuals rather than the commercial clients.

Commercial banks

accept deposits in checking and savings accounts and make loans to both commercial and personal clients

Financial institutions obtain funds for loans by

accepting deposits from individuals.

credit unions

are nonprofit organizations that accept deposits and provide personal and mortgage loans only to their members. Credit unions serve members who have a common affiliation (such as the same employer or the same community).

as current interest rates rise,

borrowers can expect to pay higher interest rate for their loans and depositors can expect to be paid higher interest rate for their deposits

Some of the banking services offered by financial institutions are

checking services, monitoring your account balance, reconciling your account balance, accessing your account balance through an automated phone service or online, electric checking, depository (savings) accounts, and personal loans.

Mentary policy is

controlling money supply

What factors should you consider when choosing a bank?

convenience of making deposits and withdrawals, including ATM locations and the availability of web based access. He should also consider interest rates paid to depositors and minimum balance requirements. Finally, Steve should consider fees such as service charges, per-check charges, and ATM use charges.

securities companies

facilitate the purchase or sale of securities by firms or individuals by 1)finding investors to purchase a firms securities 2) providing advice to firms selling securities such as the amount and price of securities to be sold 3) providing firms with advice for mergers, such as valuation and potential benefits. securities firms also provide brokerage services, helping to make a market for stocks and bonds by matching buyers and sellers.

What is a risk-free rate?

is an interest rate guaranteed on an investment for a specified period.

Mutual funds

provide a means by which investors with only a small amount of money can incest in a portfolio of securities

Finance companies

provide personal loans to individuals. These loans are usually at higher rates to individuals at a higher risk of defaulting on the loan

As current interest rates fall, depositors can expect to

receive a lower interest rate for their deposits and borrowers can expect to pay a lower interest rate for their loans

Which of the following does not depict a special service that banks provide?

safety deposit boxes, cashier's checks, Money orders, and Traveler's Checks are all special services provided by banks.

Insurance companies

sell to protect individuals and companies against perils (adverse events), and include life insurance companies, property and casualty insurance companies, and wealth insurance companies.

The interest rate for loans in determined by adding

varying percentage points to the rate paid on deposits

There is no risk because a risk-free investment

would pay investors even if the financial institution went into the bankruptcy