Finance 8 Personal Finance - Ch 4 Financial Services: Savings Plans and Payment Accounts - Focus on Personal Finance - McGraw Hill 5 edition

A certificate of deposit often charges a penalty for withdrawing funds before the maturity date. If the penalty involves two months of interest, what would be the amount for early withdrawal on a $20,000, 5 percent CD?

$20,000 x 5% = $1,000 $1,000 / 12 = $83.33 $83.33 x 2 = $166.67

What is the annual opportunity cost of a checking account that requires a $300 minimum balance to avoid service charges? Assume an interest rate of 3 percent.

$300 x 3% = $9.00

What factors are commonly considered when selecting a checking account?

1. Restrictions 2. Fees and Charges 3. Interest 4. Special services

What factors do consumers usually consider when selecting a financial institution to meet their saving and checking needs?

1. Where to get the best return on savings. 2. How to minimize the cost of checking and payment service. 3. Able to borrow money, when needed.

Mutual Savings Bank

A financial institution that is OWNED by the depositors and specializes in savings accounts and mortgages loans.

Commercial Bank

A financial institution that offers a full range of financial services to individuals, businesses, and government agencies.

What might be a savings goal for a person who buys a five-year CD paying 4.67 percent instead of an 18-months savings certificate paying 3.29 percent?

A person saving for a long period of time i.e. children education, vacation home, or retirement will use a 5-year CD.

Debt Card

A plastic access card used in computerized banking transactions, also called cash card.

Money Market Account

A savings account offered by Banks, Savings and Loans, and Credit Unions that require a minimum balance and has earnings based on market interest rates.

Vishing

A scam by phone

Activity accounts

Charge a fee for each check written Charge a fee for each deposit Has a monthly service charge NO minimum balance

Payment service

Demand deposit

Life Insurance Companies

Financial security for dependents.

I Bonds

Has interest rate based on 2 component 1-fixed rate for life of bond 2-inflation rate Every 6 months a new fixed based rate is set for new bonds Additional interest payment is recalculated twice a year based on the current inflation rate Sold in any amount over $25 Minimum holding is 1 year

Problem Financial Businesses

High fees and excessive interest rates. (high risk, unbanked (no bank services) or underbanked -(some banks services).

Finance Companies

High rate loans to consumers and businesses.

A person is concerned with loss of buying power of funds on deposit - what is his/her major influence?

Inflation

After-tax rate of return

Interest rate x (1 - Tax rate)

First buying CD - buying a new one at maturity

Rolling over CD

A middle-aged person wants assurance that the funds are safe - what is his/her major influence?

Safety

What would be the net annual cost of the following checking accounts? a. Monthly fee, $3.75; processing fee, .25 per check written, an average of 14 a month. b. Interest earnings of 4 percent with a $500 minimum balance; average monthly balance, $600; monthly service charge of $15 for falling below the minimum balance, which occurs three times a year (no interest earned in these months.)

a. Monthly fee: $3.75 x 12 = $45.00 Check fee: .25 x 14 = $3.50 $3.50 x 12 = $42.00 $87.00 b. Service Charge: $15 x 3 = $45.00 Interest earned: $600 x 4% = $24.00 24/12 = 2 x 9 = $18 45 - 18 = 27

Pawnshops

neighborhood bankers and local shopping malls

Regular savings accounts

passbook or statement accounts Credit union are called - share accounts

Underbanke

use of "shadow" financial services in addition to having a bank account.

Unbanked

using a variety of "shadow" financial services rather than having a bank account

What would be the annual percentage yield (APY) for a savings account that earned $174 on a balance of $3,250 over the past 365 days?

$174 / $3,250 = .0535 (5.35%)

If a person has ATM fees each month of $18 for six years, what would be the total cost of those banking fees?

$18 x 12 = $216 x 6 = $1,296

Janie has a joint account with her mother with a balance of $562,000. Based on $250,000 of Federal Deposit Insurance Corporation coverage, what amount of Janie's savings would not be covered by deposit insurance?

$250,000 + $250,000 = $500,000 $562,000 - $500,000 = $62,000 $62,000 / 2 = $31,000 $31,000 uninsured Janie's amount

Compounding

A process that calculates interest based on previously earned interest.

Investment Companies

Combines savings and investments

What would be the value of a savings account started with $700, earning 4 percent (compounded annually) after 10 years?

Future Value of $1 after a given number of time periods $700 x 1.480 = $1,036

After-tax rate of return Formula

Interest rate x (1.00 - Tax rate)

Switch kits

Make changing banks easier

Types of CDs

Rising-rate or bump-up CDs - higher rates at various intervals Liquid CDs - w/minimum balance offer an opportunity to w/draw money w/o a penalty Zero-coupon CDs - purchased at a deep discount w/no interest payments. $5,000 for $10,000 in 10 yrs Indexed CDs - have earnings based on the stock market. Based on CPI higher returns as inflation increases Callable CDs - start w/higher rates, long maturities Bank may "call" (close) acct after set period - receives the original deposit and any interest. Promotional CDs - attract savers w/gifts or special rates.

Deposit Institutions

Serve as intermediaries between savers and borrows and offer insured accounts.

With a 28 percent marginal tax rate, would a tax-free yield of 7 percent or a table yield of 9.5 percent give you a better return on your savings?

Table Yield: = 1.00 - .28 = .72 x .95 = .684 (6.84%) Tax-free Yield: = 7% The 7% tax-free yield is better because the table yield of 9.5% after taxes becomes 6.84%.

What are examples of deposit-type financial institutions?

1. Commercial Banks 2. Savings and Loan Associations (S&L) 3. Mutual Savings banks 4. Credit Unions

How do change economic conditions affect the use of financial services?

1. Interest rate 2. Raising consumer prices 3. Other economic factors influence financial services.

What are the main types of savings plans offered by financial institutions?

1. Regular savings account 2. Certificate of Deposit 3. Interest-earning checking account 4. Money market account and funds 5. U.S. Savings bond.

What are the major categories of financial services?

1. Savings 2. Payment Service 3. Borrowing 4. Other financial

If you earn a 4.2 percent return on your savings, with a 15 percent tax rate, what is the after-tax rate of return?

1.00 - .15 = .85 .85 x 4.2% = .0357 (3.57%)

Money Market Fund

A savings investment plan offered by investment companies, with earnings based on investments in various short-term financial instruments.

Certificate of Deposit (CD)

A savings plan requiring that a certain amount be left on deposit for a stated time period to earn a specified interest rate.

Credit Union

A user-owned nonprofit cooperative financial institution that is organized for the benefit of its members.

Annual Percentage Yield (APY) Formula when the number of days in the term is 365 or where the amount does not have a stated maturity, the APY formula is simply

APY = 100(Interest / Principal) 100[(1+$56.20/$1,000)365/365 - 1] =.0562 = 5.62%

Annual Percentage Yield (APY) Formula

APY = 100[(1+Interest/Principal) 365 days in term - 1 Principal = Amount of funds on deposit Interest = Total dollar amt earned on the principal Days in term = Actual number of days in the term of the account

Asset Management Account

An all in one account that includes savings, checking, borrowing, investing, and other financial services, for a single fee, also called a cash management account.

What amount would you have it you deposit $1,800 a year for 30 years at 8 percent (compounded annually)

Future Value of $1 paid in the end of each period for a given number of time periods (Annuity) $1,800 x 113.280 = $203,904

How do inflation and taxes affect earnings on savings?

Inflation and taxes reduce the real interest earned on savings.

Cash Cashing Outlets

Interest rates of 1% to 20% of face value of check. Offer tax filing, money orders, private postal boxes, utility bill payment, sale of transit tokens

Brokerage Firms

Investment advisors

Rent to Own Centers

Lease to own after a number of payments. Up to 300% interest.

An older couple needs easy access to funds for living expenses - what is their major influence?

Liquidity

Mortgage Companies

Loans for home purchase.

What financial services are available through electronic banking system?

Obtaining cash Transfer funds Direct deposit

Near-field communication (NFC) Mobile Transfers

Technology stores credit card and banking account information

Car Title Loan Companies

Using your car as collateral for 30 days as much as 200% interest.

Regular checking accounts

Usually, has a monthly service charge may be voided by keeping a minimum balance in account Waived monthly fee by keeping a certain amount in savings.

Overdraft Protection

An automatic loan made to checking account customers to cover the amount of checks written in access of the available balance in the checking account.

A desire to pay bills using your home computer instead of writing checks - what is the payment method?

Banks and online companies - serve as third-parties to facilitate online bill payments.

Pawnshops-Loans

Based on value of tangible possessions, interest rates from 3% a month to 100% annually.

Currency exchange

CCOs offer electronic tax filing, money orders, private postal boxes, utilities bill payment, and sale of transit tokens.

Payday Loan Companies

Cash advances as much as 780% interest annually. Writes a check for $155, to borrow $100, for 14 days. Cashed when they get paid. $391%. Some times roll over to another 14 days.

Payday loan companies

Cash advances, check advance loans, postdated check loans, and delayed deposit loans

Check Clearing for the 21st Century Act

Check 21 Shortens the processing time Established the substitute check = a digital reproduction of the original paper check

Smart cards

Digit wallets similar to ATM cards with an embedded microchip Stores past purchases, insurance infomation, medical history

Traveling to Asia, you desire to be able to access funds in the local currencies of various countries - what is the payment method?

Electronic traveler's check - allows access to funds in the local currency of various countries

Credit Card Companies

Funding short-term retail lending.

EE Bonds

May be purchased for any amount greater than $25. Purchased online at face value $50 for $50 interest accrues monthly and compound semi-annually Main tax advantages - 1-interest earned is exempt from state and local taxes 2-Federal income tax on earnings is not due until bonds are redeemed - may be exempt from federal income tax if funds are used to pay tuition and fees at a college

Non-Deposit Institutions

Offer various financial services, but are not insured.

Financial supermarkets

One-stop financial service (savings, checking, credit, insurance, investments)

Stored-value cards

Prepaid cards for telephone service, transit fares, highway tolls, laundry service, and school lunches Prepaid debit cards

Brenda Young desires to have $15,000 eight years from now for her daughter's college fund. If she will earn 6 percent (compounded annually) on her money, what amount should she deposit now? (Use Present Value of a single amount)

Present Value of $1 to be received at the end of a given number of time periods $15,000 x .627 = $9,405.00

A saver desires to maximize earnings from the savings plan - what is the saver's major influence?

Rate of Return

What is usually influenced in selecting a savings plan

Rate of return or Yield - % increase in value of savings & increase w/frequency of compounding Inflation - HIGHER consumer prices result in LOWER buying power of interest earned on savings. Tax consideration - Taxable interest reduces amount of earnings Liquidity - Ease with which savings can be withdrawn Safety - Available of deposit insurance and risk Restrictions - Minimum balance limitates Fees - for additional transactions

Truth in Savings (TIS)

Reflects the amount of interest a saver should expect to earn.

You write only a few checks a month and you want to minimize your costs - what is the payment method?

Regular checking account - with a minimum balance monthly service charges are waived.

Interest-earning checking

Require a minimum balance Under minimum balance, no earned interest and incur a service charge Also called share draft accounts

Truth in Savings Act

Requires financial institutions to disclose the following on savings account plans: 1-Fees on deposit accounts 2-Interest rate 3-Annual percentage yield (APY) 4-Terms and conditions of savings plan

How does money market account differ from a money market fund?

The money market account is covered by federal deposit insurance and has earings on the interest rate. The money market fund is not covered by federal deposit insurance and has earings on investments.

Rate of Return

The percentage of increase in the value of savings as a result of interest earned also called yield.

Annual Percentage Yield (APY)

The percentage rate expressing the total amount of interest that would be received on a deposit based on the annual rate and frequency of compounding for a 365-day period.

HH Bonds

WERE current-income bonds w/interest deposited electronically every 6 months

Are checking accounts that earn interest preferable to regular checking accounts? Why or Why not?

Yes, checking accounts that earn interest are preferable to regular checking account becasue the account earns interest depending on the minimum balance required

An ATM with a service fee of $2 is used by a person 100 times in a year. What would be the future value in 10 years (use a 3% rate) of the annual amount paid in ATM fees?

100 x $2 = 200 x 11.464 = $2,292.80

A payday loan company charges 5 percent interest for a two-week period. What would be the annual interest rate from that company?

26 wks x 5% = 1.30 (.0130%)

What would be the annual percentage yield for a savings account that earned $56 in interest on $800 over past 365 days?

56 / 800 = .07 x 100 = 7.00%

A need to send funds for a purchase from an organization that requires guaranteed payment - what is the payment method?

A certified check - guarantees payment

Automatic Teller Machine (ATM)

A computer terminal used to conduct banking transactions also called a cash machine.

Savings and Loan Association (S&L)

A financial institution that traditionally specializes in savings account and mortgage loans.

Trust

A legal agreement that provides for the management and control of assets by one party for the benefit of another.

Compare the costs and benefits of these two checking accounts: Account 1: A regular checking account with a monthly fee of $6 when the balance goes below $300. Account 2: An interest-earning checking account (paying 1.2 percent), with a monthly charge of $3 if the balance goes below $100.

Account 1: Regular Checking is free if the balance does NOT go below $300. Account2: Interest-earning checking will receive interest (money) if the balance does NOT go below $100.