Personal Finance Chapter 5 Review Sheet CHAPTER 5 REVIEW SHEET

DEPOSIT INSTITUTIONS accept secure deposits and provide transfer and lending services.

The largest national banks are offering interest rates on their checking accounts that are about one-quarter the rate that can be found at smaller regional banks or through online banks. According to a recent report published by www.bankrate.com, NONE of the fifty largest banks in the country make it onto the list of banks offering the “best” checking accounts for consumers. Always keep in mind that your ultimate goal with banks should simply be to obtain the services and convenience you need, with the lowest costs and highest interest rates available.

The Commercial Bank  For-profit institutions that offer a full range of financial services. Commercial banks conduct business through a charter, or license, granted either by the federal government or state government.  Outside individuals or STOCKHOLDERS own commercial banks. Commercial banks are publicly-held corporations with stockholders who invest the necessary capital for operation. Their primary goal is to make money for their stockholders.  Checking, savings, lending, and other investments (money market, CD, etc) are offered.  Accountholders earn interest.  Individuals and businesses can have an account at a commercial bank.  Commercial banks are insured by the FDIC for up to $250,000 per account.  DEFINING CHARACTERISTICS: Convenient! Many branch locations available! Many types of consumer loans! Full Service! Access to your money 24 hours a day!  Example: Citizens Bank

The Savings and Loan Assocation (S&L)  Traditionally, S & L’s specialized in savings accounts and mortgage loans, but now offer many of the same services as commercial banks. S & L’s have either a state or federal charter.  S & L’s owned by shareholders (stock ownership) or by their depositors (mutual ownership).  Checking, savings, business loans, and investment services are offered.  Accountholders earn interest.  Individuals and businesses can have accounts.  Insured up to $250,000 per account.  DEFINING CHARACTERISTICS: Better lending rates and policies, S & L’s channel depositor savings to make mortgage loans for home buyers (and consumer and business loans as well).  Example: West View Savings – West View Savings Bank is a PA-chartered, SAIF-insured stock savings banks conducting business from 6 offices in the North Hills Suburbs of Pittsburgh. Organized in 1908 under PA law as West View Building and Loan Association, West View changed its name to West View Savings and Loan Association in 1954. In June 1992, West View converted to PA-chartered mutual savings bank. The Savings Bank converted to the stock form of ownership in November 1993. WVS Financial Corp. is the parent holding company of West View Savings Bank organized in July 1993 as a PA-chartered unitary bank holding company y and acquired 100% of the common stock of the Savings Bank.

Federal Deposit Insurance Corporation (FDIC)  Established in 1933 by the Federal Government  Why? Reaction: During the Great Depression of the 1930s, most banks failed. The people and businesses that had made deposits in these institutions lost their money.  FDIC insures each account in a federally chartered bank up to $250,000 per account.  Also administers SAIF (Savings Association Insurance Fund) for S & L’s.  The Federal Reserve is the United States’ central bank. It controls the flow of money in and out of banks and maintains the stability of the financial system.  All national banks must be members of the Federal Reserve. Membership is optional for state banks.  State banks are chartered, regulated, and supervised by their state’s banking division.  The FDIC is the federal regulator of state-chartered banks that don’t belong to the FED.

Personal Finance Chapter 5 Review Sheet The Credit Union  Non-profit financial institutions owned by members and organized for their benefit.  Depositors (“account holders”) own a credit union. Each member has a vote in Board of Director elections.  Democratically controlled – everyone enjoys the same rates, programs, and fee structure.  Most offer full range of services (checking, loans, credit cards, ATMS, investment services).  Account holders earn dividends (payments made by corporation to shareholders).  Profits stay within the organization and are returned to its members in the form of higher dividents, lower rates, and free or low cost services.  Traditionally one must be a member with a credit union and members typically had a common bond, such as membership in a union, college alumni association, or employment by the same company. o Today, membership restrictions have lessened. Many simply require that you live or work within a certain geographical area to become a member. o One’s money is insured up to $250,000 in a credit union account by the National Credit Union Share Insurance Fund (NCUSIF). o FDIC insurance through NCUA (National Credit Union Association). o DEFINING CHARACTERISTICS: fees and loan rates may be lower than commercial banks, credit unions are exempt from federal taxes since they are non-profit, LOWER FEES, not many branch locations in a given area (1-2 on average). o Example: Greater Pittsburgh Federal Credit Union

Savings Accounts  Regular Savings accounts – interest-bearing account that can be opened with a LOW amount of money where funds can easily be deposited or withdrawan. . Passbook Savings – Given a booklet to enter deposits, withdrawals, and interest . Statement Savings – Receive a statement, usually once a month, detailing transactions. o Benefits: LOW minimum balance (possible monthly maintenance fees), liquid account, unlimited withdrawals, (rates float – go up and down – as market changes), FDIC insured up to $250,000 per account, Emergency fund – 3- 6 months of living expenses. o Drawbacks: Low rate of return, limited preauthorized transfers, *rates float as market changes. o Person planning to make frequent deposits and frequent withdrawals would benefit from regular savings.  Certificates of Deposit (CDs) – a savings alternative in which money is left on deposit for a stated period of time to earn a specific of return. o Different from regular savings in that they have a specific term ( often 3 months, 6 months, or 1-5 years) and fixed interest rate (rate is unchanged for that time). o Offer higher interest rates in exchange for NOT touching your money for a predetermined amount of time. The longer you agree to, the higher the interest rate. o Intended that CD be held until maturity, at which time money can be withdrawn together with accrued interest. o Benefits: Guaranteed rate of return, higher interest rate than a regular savings account, interest payments may be withdrawn as they are received, FDIC insured up to $250,000 per account o Drawbacks: NOT liquid, possible penalty for early withdrawal, high minimum deposit required to open account ($500-$1,000) o Bank usually mails notice to CD holder shortly before it matures requesting directions. In the absence of directions from the CD holder the bank with “roll over” the CD into a new account. o Penalties for early withdrawal: CD term of 30 days- Penalty = All interest to be paid, CD term of 2-12 months – Penalty = 3 months interest, CD term of 13-36 months- Penalty= 6 months interest. o When interest rates are high take out a long-term CD; when interest rates are low take out a short-term CD.

 Money Market Savings Accounts – savings account that requires a minimum balance and earns interest that varies from month to month. o Benefits: Liquid account (you have access to your money without penalty), earn higher interest rate than a savings account *Rates float as market rates change, FDIC insured up to $250,000. o Drawbacks: higher opening deposit than a regular savings account, higher minimum balance required than a regular savings account (typically $1,000 or higher), may have a penalty if balance goes below minimum amount, limited number of checks written to make large payments or to transfer money to other accounts. *rates float. Personal Finance Chapter 5 Review Sheet

Checking Accounts

 Basic Checking – some require low min. balance to avoid monthly “maintenance” fees; may be limited to certain number of checks per month(exceed that and you’ll pay a “per item” fee for each additional check written) o For individuals who just use account for some bill pay and occasional use of debit card for daily expenses; someone who won’t go below min. balance, or that does not use account to maintain high balance since it doesn’t earn interest.

Free Checking – NO minimum balance required, NO maintenance or activity fees, (maintenance fee- monthly service charge that you incur if your balance slips below ceratin level; activity fee – could be a charge for writing more than a specified number of checks in a month). o Write all the checks you like and keep your balance as low as you want without worrying about paying a fee. o May be limited to withdrawing $300 per day at an ATM for instance. o Banks may require that a regular payment such as a paycheck be direct-deposited. o For most people this is the best kind of checking account. (according to www.bankrate.com)

Interest-Bearing Account – usually requires a min. balance to open ($1,000 for example) and an even higher balance ($5,000 for example) to maintain and avoid maintenance fees. o Interest usually paid monthly, LOW interest rate. o Typically for the individual who is able to maintain a higher balance of $1,000 or more in checking, and who doesn’t write a lot of checks (account isn’t used often).

Express Checking – unlimited check writing (transactions), low min. balance requirements, low or no monthly fees, CATCH – you have to pay a FEE for using a teller. o For the individual who prefers to bank by ATM, by phone (text messaging), or online; popular with students or younger customers on the go who don’t want to spend a lot of time visiting and making banking transactions.

Senior/Student Checking – special discount deals if you’re a student or 55 years or older; perks vary bank to bank; free checks, free ATM use, better rates on loans and credit cards or other discounts.

Money Market Checking – Account combines checking with savings/investments; requires HIGH MIN. DEPOSIT to open ($1,000-$10,000); requires a higher balance to avoid fees ($10,000-$20,000); pays more interest than regular checking and savings; imposes tigher limits on checking transactions than other accounts; variable interest rates o For the individual who can afford to maintain the higher balance requirement and doesn’t write more than 3-5 checkes per month.

***OVERDRAFT PROTECTION: a voluntary banking plan which if you overdraw your checking account the bank will pay the check and take the money from one of your other accounts (assuming the funds are available in another account to cover the check). ****BOUNCED CHECK: insufficient funds in the account to cover the amount written on the check. Fee for bounced checks.

COMPOUND INTEREST: Make sure you know the formula!!

o Be able to calculuate future value, time and interest rate. o Apply the Rule of 72 ONLY as a way to estimate the amount of time it will take money in an account or an investment to double in value.

FV=______PV = ______r = ______n = ______t = ______

COMPOUNDING Annually Semiannually Quarterly Monthly Weekly Daily

n =

Personal Checking – be able to balance a checkbook and follow steps for a bank reconciliation. Personal Finance Chapter 5 Review Sheet COMPOUND INTEREST PRACTICE

Find the total value of the investment after the time given.

1. $7,300 at 7% compounded semiannually for 3 years.

2. $1,030 at 4% compounded annually for 2 years.

3. $18,000 at 9% compounded quarterly for 6 years.

4. $1,500 at 7.25% compounded daily for 3 years.

5. $28,600 at 6.9% compounded monthly for 2 years.

6. $135 at 9.4% compounded weekly for 3 years.

Determine how long it will take the investment to reach its future value under the given conditions.

7. $1,200 is to reach $5,000 compounded semiannually at 4.25% in how long?

8. $2,000 is to reach $10,000 compounded quarterly at 6% in how long?

9. $13,000 is to reach $15,000 compounded annually at 3.99% in how long?

Personal Finance Chapter 5 Review Sheet

Use the Rule of 72 to estimate how long it will take the investment to double.

10. $3,000 compounded annually at 5%.

11. $150 compounded annually at 4.25%

12. $4,500 compounded annually at 6.35%.

Use the compound interest formula to determine what interest rate is needed for the investment to reach its future value under the given conditions.

13. $1,250 to $5,000 compounded quarterly for 4 years.

14. $3,000 to $6,000 compounded semiannually for 2 years.

15. $500 to $2,500 compounded annually for 10 years.