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Banking

Banking. Systems. What is meant by the ‘fractional reserve’ system?. Banking. Analyze money creation in banking activities Explain how money circulates in the US Terms: Primary reserves Secondary reserves Excess reserves Multiplier effect. Banking.

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Banking

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  1. Banking Systems

  2. What is meant by the ‘fractional reserve’ system?

  3. Banking • Analyze money creation in banking activities • Explain how money circulates in the US • Terms: • Primary reserves • Secondary reserves • Excess reserves • Multiplier effect

  4. Banking • Banks earn much of their profit by lending • Banks actually ‘create’ and circulate money as they do business

  5. Banking • Primary Reserves • Cash on hand • Required amounts in the Federal Reserve District bank • Secondary Reserves • Securities purchased from the federal government • Deposits due from other banks • Used to meet liquidity needs • Excess Reserves • Monies held (beyond the reserve requirement • Money used to create money through loans

  6. Banking Calculate the total amount of money “created” from a deposit of $15,000 based on a 10% reserve requirement. deposits Deposit 1: $15,000 - $1,500.00 = $13,500 Deposit 2: $13,500 - $1,350.00 = $12,150 Deposit 3: $12,150 - $1,215.00 = $10,935 Deposit 4: $10,935 - $1,093.50 = $9841.50 Total deposits $46,426.50

  7. Banking Important points to remember: Banks are a business 1 – Your bank must have enough total reserves to cover your checks 2 – Your bank must estimate the amount of reserves needed at any particular point in time. 3 – Banks follow the money supply and the economy to anticipate liabilities and reserve requirements 4 – Banks that make poor judgments about the type and amount of loans may find themselves in trouble

  8. Deposit Accounts • Checking Accounts • Check 21 • Basic • “Free Checking” • “No service charge” • Interest bearing • Express • Lifeline • Asset Management • Online banking • Mobile banking • ATM Make sure you check the fee structure

  9. Interest and Interest Rates • Remember… banks are businesses • The money supply and the economy are linked closely to interest rates. • When interest rates are high…………………. Money is “tight” • When interest rates are low……………………more credit is available Where have we heard this before? http://www.federalreserve.gov/consumerinfo/fivetips_checking.htm

  10. Interest Rates • Monetary policy • Market forces • Banks set rates • Economic conditions • Inflation • The cost of money • Federal funds rate • Discount rate Factors that affect interest rates

  11. Calculating Interest • Interest is the price paid for the use of money • Principal is the original amount borrowed • Rate is the amount of interest expressed in % • Time is the length of time the loan will take to be repaid; expressed in years of part of a year • P X R X T = I Portions of a year: Six months = .5 Nine months = .75 1-1/2 years = 1.5

  12. Calculating Interest • Simple Interest An agreed upon rate of interest paid on an account at a particular time. • If you had $2200 in an account that paid 4-1/2% interest annually P X R X T= I • Compound Interest This rate is calculated by adding interest to the new total and paying compound interest. $2200 X .045 X 1= $99.00 $2299 X .045 X 1= $103.45 $2200 X .045 X 1= $99.00 $2200 X .045 X 1= $99.00 $198.00 $202.45

  13. Calculating Interest The algebraic formula for calculating compound interest is … F = P(1+R)n F= future value P = principal R = rate n = number of intervals

  14. Calculating Interest APR Nominal rate on which interest is calculated. What you will pay. APY …represents how much will be received with simple and compound interest.

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