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SSEPF2 The student will explain that banks and other financial institutions are businesses that channel funds from savers to investors. a. Compare services offered by different financial institutions. b. Explain reasons for the spread between interest charged and interest earned. c. Give examples of the direct relationship between risk and return. d. Evaluate a variety of savings and investment options; include stocks, bonds, and mutual funds. Banks and Financial InstitutionsBanks and financial institutions are businesses that channel funds from ________________ to ________________Commercial BanksFunctions/services offered:Receive ________________ of moneyExtend ________________Debit cards & credit cards Provide ________________Checking and savings accountsDirect deposit Structure:Similar to corporations with ________________ who own and manage banks for a ________________Main source of income:Interest and fees charged on loansIn the event of a bank failure, your money is protected as long as the bank is insured by the Federal Deposit Insurance Corporation (FDIC). Any lending institution will require some kind of ________________ to secure a loanCollateral is anything of value that could be used to cover the value of the loan in the event the borrower is unable to ________________ the loanE.g., the bank takes your house as collateral for a mortgage and your car serves as collateral for a car loan Credit UnionsFunctions/services offered:Receive deposits of moneyExtend creditProvide loansChecking and savings accounts: typically offer higher ________________ rates on deposits because they pay lower taxes than banksStructure:Cooperative associations that serve only their ________________; members own and control C.U. Main source of income:Interest and fees charged on loansSavings and Loan AssociationsSavings institutions designed to aid ________________ and ________________Deposits are not as easily accessible, but rates of return are higherFocuses on ________________Payday Loan CompanyShort-term loans made based on a borrower’s future ________________Typically much higher interest rates than banks:Fees are extremely high: up to $17.50 for every $100 borrowed Interest rates: 911% for a one-week loan; 456% for a two-week loan, 212% for a one-month loan.SSEPF2 The student will explain that banks and other financial institutions are businesses that channel funds from savers to investors. b. Explain reasons for the spread between interest charged and interest earned. Interest Charged vs. Interest EarnedBanks pay depositors interest on the money they ________________ as savingsBanks charge borrowers interest on the money they ________________In order to make a profit, the banks must charge a higher interest rate to borrowers than the rate they pay their depositorsSSEPF4 The student will evaluate the costs and benefits of using credit. c. Explain the difference between simple and compound interest rates. Simple vs. Compound Interest________________ is the amount of money (usu. expressed as a percentage) that a lender charges a borrower in exchange for the use of their moneyAs a borrower, you pay interest when you repay a loan in addition to repaying the principal amount of your loanAs a saver, the bank pays you interest when you deposit money in a checking or savings accountThere are two types of interest: ________________ and ________________Simple InterestSimple interest is a rate that is applied only to the value of the ________________ (principal = the amount of money originally borrowed)E.g., on a $10,000 loan with 5% interest, your annual interest payment will always be $500 (10,000 x 5%)E.g., on a $10,000 savings account earning 5% interest, you will earn $500 each year in interest (10,000 x 5%) Compound InterestCompound interest is applied to both the principal and the ________________ ________________E.g., on a $10,000 loan with 5% interest, your year 1 interest payment will be $500 (10,000 x 5%); year 2 interest will be $525 (10,500 x 5%) for a total amount owed of $11,025E.g., on a $10,000 savings account earning 5% interest, you will earn $500 in the first year in interest (10,000 x 5%). At the beginning of year 2, your account balance will be $10,500 and you will earn interest on that amount: $525 (10,500 x 5%) $11,025SSEPF2 The student will explain that banks and other financial institutions are businesses that channel funds from savers to investors. c. Give examples of the direct relationship between risk and return. Risk and ReturnPeople tend to invest when they are confident that the likely return of their investment is worth any riskReturn is the eventual ________________ you receive from an investmentRisk is the chance that an investment might end up losing money rather than making it The general rule of thumb: The greater the risk, the greater the possible return; the lower the risk, the lower the return BIG QUESTION: How much risk can you afford?If you make an investment and it fails causing you to lose all of your money, will you still be financially okay?Stocks, Bonds and Mutual FundsStocks = shares in a company that an individual or organization purchases that give the person or organization a partial ownership interest in the companySelling stocks is one way for companies to finance their business (i.e., to raise money)Purchasing stocks is a way for individuals or organizations to invest their moneyStocks are risky by nature E.g., investors in Enron lost a lot of moneyE.g., early investors in Micro Soft or Apple made a lot of money Bonds are loans to a company or a government; government bonds are generally low-risk, therefore they offer a lower rate of returnIssuing bonds is another way for a company or government to _____________________________Purchasing bonds is another way for individuals or organizations to ________________ their moneyNo ________________ interest is transferred in the sale of a bond Mutual funds pool money from a number of investors to buy a range of stocksRisk is reduced because the investment is spread among several companies (________________): if one fails, it is likely that others will succeedRisk is reduced because mutual funds are managed by financial expertsDownside of mutual funds is that the return is typically ________________ and investors must pay some kind of ________________ to the fund manager SSEPF3 The student will explain how changes in monetary and fiscal policy can have an impact on an individual’s spending and saving choices. a. Give examples of who benefits and who loses from inflation. b. Define progressive, regressive, and proportional taxes. c. Explain how an increase in sales tax affects different income groups. Note: in the following guided notes, the arrow symbol stands for “leads to”Review of Fiscal Policy:What are the tools of fiscal policy? ___________________________________________________________Who controls fiscal policy? __________________________________________________________________Review of Monetary Policy:What are the tools of monetary policy (DR RROMO)? ____________________________________________Who controls monetary policy? ______________________________________________________________The Impact of Fiscal PolicyIf the government ___________________ taxes, the following will result: Consumers are left with less ___________________ to invest and to spend in the marketplace, which leads to: Inflation ___________________ as a result of the decreased demand for productsWhen taxes are _____________, inflation increases because people have more money to spend so:Producers can afford to ___________________ their prices and still do wellEffects of InflationWho’s Helped: Some people ___________________ in an attempt to take advantage of rising prices. They may buy luxury items or other expensive goods that are expected to increase in price. (“Buy low, sell high”)Who’s Hurt: ___________________ or lenders are hurt because ___________________ that were made at the beginning of an inflationary period are repaid later with dollars that buy less; People on ___________________ incomesMonetary Policy: Reserve RequirementIf the Fed ___________________ the reserve requirement, this will result in banks having less money that they can lend to consumers. The decrease in the availability of ___________________ funds means that banks will make fewer loans and interest rates will ___________________.An increase in interest rates makes loans more ___________________ and fewer people will make enough money to qualify for loans.Similarly, an increased interest rate may make loans ___________________ for some consumers even though they qualify.Monetary Policy: Discount RateA ___________________ discount rate results in banks borrowing ___________________ money from the Fed so, they have less money to lend to consumers so, interest rates will __________________.Remember that one consequence of higher interest rates is people save more and spend less Monetary Policy: Open Market OperationsWhen the Fed sells bonds, it encourages people to ___________________ their moneyWhen the Fed buys bonds, it encourages people to ___________________ moneyTypes of TaxesProgressive tax: Any tax for which the amount you pay ___________________ with incomeE.g., a progressive ___________________ tax means that someone who makes $100,000 probably pays more than a person who earns $30,000 (maybe 15% versus 5%)Regressive tax: People pay a higher percentage of tax the ___________________ money they make___________________ taxes are regressive because people with lower incomes pay a higher percentage in tax:If taxes on a new $10,000 car are 7% or $700, that amount will be a higher proportion of the income of someone who makes $20,000 per year than a person who makes $100,000Sales taxes, therefore, affect ________________ people more than __________________3.Proportional tax: Everyone pays the same amount ___________________ to their ___________________.E.g., a proportional income tax would require everyone to pay the same percentage of their annual income (say 10%).Therefore, the millionaire would pay $100,000, the person earning $50,000 would pay $5,000, and the high-school grad earning $20,000 would pay $2,000—each pays the same proportion of their income but different amounts.SSEPF5 The student will describe how insurance and other risk-management strategies protect against financial loss. a. List various types of insurance such as automobile, health, life, disability, and property. b. Explain the costs and benefits associated with different types of insurance; include deductibles, premiums, shared liability, and asset protection. Insurance involves transferring ____________________ to others.Insurance provides financial coverage if an insured item is lost or damagedProtects policyholders and their beneficiaries from financial ____________________Types of insuranceLife: Pays money to a beneficiary on the __________________ of an insured; insured pays monthly premiumsHealth/medical: Covers health and medical expensesDisability: Provides a policy holder income in the event that they become disabled and cannot workProperty insurance:Homeowner’s insurance: Covers a policyholder’s house in the event that it is ____________________ or ____________________Automobile insurance: Liability and possibly collision Liability insurance: Pays for damages if the policyholder is found ____________________ ____________________ for an accidentE.g., auto liability, homeowner’s policy, comprehensive liabilityInsurance-related TermsDeductible: The?amount you have to pay out-of-pocket for ____________________ before an insurance company?will cover the remaining costs.For example, let’s say you have an auto insurance policy that has a $300 deductible. You are speeding out of the McNair parking lot one day, and because you haven’t learned to drive yet, you run into Mr. Owens’ car. If your medical expenses are $2,000 (the Illuminati rigged the accident), how much of your medical bill would you have to pay out of pocket?What if you got lucky and your medical bills were only $300 (your car ran over your own foot when you got out to see how bad you hurt Owens’ car)—how much would you and the insurance company pay in that case?Premium: Monthly, quarterly or annual price paid for an insurance policy. The premium is paid by the insured party to the insurer, and primarily compensates the insurer for bearing the ____________________ of a payout should the insurance agreement's coverage be required. Typically there is an inverse relationship between premiums and deductibles:The higher your premium, the _______________ your deductibleThe lower your premium, the _______________ your deductibleIn your notes, write why you think this relationship is inverse. Also write why someone might choose to have a low-premium/high-deductible policy.Asset protection: A benefit from holding insurance that provides financial payments in the event of the loss of a ______________________. Also, insurance can protect other individual or business assets by providing a source of repayment in the event of a loss due to liability. (In other words, if you are sued for damages from a car wreck, your auto insurance policy can pay for the damages instead of you having to sell other assets to get the funds to pay.) Purchasing insurance involves _____________________________ between the insurer and the insured. This means that the insurance company assumes a pre-determined amount of financial liability for a claim that the insured might file because the insured has paid premiums for the financial protection. ................
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