Chapter 5 Class Notes - Wright State University

Chapter 5
Banking Services:
Savings Plans and
Payment Accounts
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
A Strategy for Managing Cash
• Cash, check, credit card or an ATM are the
most common payment choices.
• Common mistakes in managing cash
 Overspending from impulse buying and using
credit cards.
 Not having enough liquid assets (cash and
checking account) to pay current bills.
 Using savings or borrowing to pay for current
 Failing to put unneeded funds in an interestearning savings account or investment plan.
Types of Financial Services
• Savings.
 Time deposits in savings, CD’s.
• Payment services.
 Checking accounts are
called demand deposits.
 Automatic payments.
• Borrowing for the short- or long-term.
• Other financial services.
 Insurance, investment, real estate purchases, tax
assistance, and financial planning are additional
services you may use.
Types of Financial Services
• Asset management account.
 Also called a cash management account.
 Offered by brokers and financial institutions.
 Provides a complete financial services
program for a single fee and includes...
A minimum balance.
A checking account and an ATM card.
A credit card
Online banking.
Access to a variety of investments. or
Electronic Banking Services
• Direct deposit of paychecks and other
regular income.
• Automatic payments transfer funds for
savings or to pay bills. Deduct them from
your register.
• ATM access to obtain cash, check account
balances, and transfer funds - check out
the fees.
• A debit card - takes money out of your
account. Lost card liability $50-$500.
Opportunity Costs
of Financial Services
• Higher rate of return may
be obtained at the cost
of lower liquidity.
• Convenience of a 24-hour ATM
should be considered against service fees.
• The “no fee” checking account with a $500
non-interest-bearing minimum balance
means lost interest of nearly $400 at 6
percent compounded over 10 years.
Changing Interest Rates and Decisions
Related to Financial Services
The prime rate is what banks charge large
corporations. See
 When interest rates are rising...
 Use long-term loans to benefit from current low
 Select short-term savings instruments to take
advantage of higher rates when they mature.
 When interest rates are falling...
 Use short-term loans to take advantage of
lower rates when you refinance the loans.
 Select long-term savings instruments to
“lock in” earnings at current high rates.
Types of Financial Institutions
• Deposit type institutions
 Commercial banks are corporations that offer a full
range of services including checking, savings,
lending and other services.
 Savings and loan associations have checking
accounts, specialized savings plans, loans
including mortgages, and other financial planning
 Mutual savings banks specialize in savings
accounts and mortgage loans. They are owned by
their depositors.
 Credit unions are user-owned, nonprofit and
provide comprehensive financial services.
Types of Financial Institutions
• Non-deposit type institutions.
 Life insurance companies offer insurance
plus savings and investment features.
Some offer financial planning and
investing services.
 Investment companies offer a money
market fund on which you can write a
limited number of checks.
 Finance companies make short and
medium term loans to consumers, but at
higher rates.
Types of Financial Institutions
• Non-deposit type institutions
 Mortgage companies provide loans to
customers so they can purchase homes.
 Pawnshops make loans on possessions but
charge higher fees than other financial
institutions. Used for quick cash.
 Check-cashing outlets charge 1-20% of the
face value of a check. 2-3% is average.
Comparing Financial Institutions
• Basic concerns of a financial services
 Where can I get the best
return on my savings?
 How can I minimize the
cost of checking and
payment services?
 Will I be able to borrow
money when I need it?
Choosing a Financial Institution
• Consider
Services offered.
Interest rates.
Fees and charges.
Financial advice.
Safety (deposit insurance).
Online services.
Special programs.
Types of Savings Plans
• Regular savings accounts.
• Certificates of deposit.
• Require you to leave your money on deposit
for a set time period, otherwise you incur
 Several types to chose from.
 Consider all the earnings and all the costs.
• Interest earning checking accounts.
• Money market accounts and funds.
 Money market accounts are covered by the FDIC,
but money market funds are not.
Types of Savings Plans
• U.S. savings bonds.
 Series EE sold at half of face value, with
potential tax advantages if used to pay tuition
and fees.
 Series HH pays interest every six months.
 I Bonds combine fixed rated and inflation rate.
 See for rates.
• Advantages
 Exempt from state and local income taxes.
 You don’t have to pay federal income tax on
interest until redemption.
Evaluating Savings Plans
• Rate of return or yield.
 Percentage increase in value due to interest.
 Frequent compounding means more interest
earning interest
• Inflation - compare your APY with inflation
• Taxes – after-tax rate of return
• Liquidity – early withdrawal penalties?
• Safety - FDIC and NCUA.
 FDIC insures up to $100,000 per person per
financial institution (see
After Tax Rate of Return
• (1 - tax rate) x yield on savings
• (1 - .28) x .06
• .72 x .06
• 4.32%
• A person earns 6% on savings, but
has a 28% marginal tax rate. The
after tax rate of return is 4.32%.
What is “Truth in Savings?”
• Requires Disclosure of...
Fees on deposit account.
The interest rate.
The annual percentage yield.
Other terms and conditions.
• Sets formulas for computing the APY.
• Requires disclosure of fees and APY on
customer statements.
• Establishes rules for advertising accounts.
• Restricts method of calculating the balance
on which interest is paid.
Payment Methods
• Checks
• Debit Cards
• Online Payments –most credit cards
now offer this service
• Stored-value cards
• Smart Cards
Checking Accounts
• A major portion of business transactions are
conducted by check, making a checking
account a necessity for most people.
• Types of checking accounts include...
 Regular – many have minimum balances.
 Activity account-fees on checks & deposits.
Checking Accounts
• Types of checking accounts
 Interest-earning or NOW accounts which
usually require a minimum balance.
 Share draft accounts are interest earning
checking accounts at credit unions.
• Evaluating checking accounts.
Restrictions, such as a minimum balance.
Fees, and charges.
Interest rate and computation method.
Special services, such as overdraft protection.
Other Payment Methods
• Certified check.
 Personal check with guaranteed payment.
• Cashier’s check.
 Check of a financial institution you get by paying
the face amount plus a fee.
• Money order.
 Purchase at financial institution, post office, store.
• Traveler’s check.
 Sign each check twice.
 Electronic traveler’s checks - prepaid travel card.
• Change the bank statement balance to
reflect deposits in transit and
outstanding checks.
• Change the check register balance to
reflect interest, bank fees, direct
deposits, automatic payments, etc.
Types of Endorsements
• Blank – Just sign your name; the check
is now bearer paper
• Restrictive – For deposit only
• Special – Endorse the check to
someone else
Online Activity
• Go to and explore
money market account rates.
• Also look at rates for one year and five
year CD’s. If you had money to invest
right now, which maturity of CD’s would
you choose?