Financial Intermediaries

1. Financial Intermediaries

2. Financial Intermediaries • Financial institutions which act as a “middleman” between lenders and borrowers • Two most important are banks and mutual funds

3. Banks • Intermediary that people are most familiar with • Main function is to bring together savers and borrowers • Personal saving helps the economy grow by providing funds for business investment

4. Other Functions of Banks • Also helps to facilitate purchases of goods and services by allowing people to write checks against their deposits • Store Money- FDIC insurance protects people from losing their money (up to $100,000) if the bank is unable to repay funds • FDIC encourages savings by guaranteeing the safety of most bank deposits • Saving Money-savings accounts, checking accounts, certificates of deposits (cds) • Loans • Mortgages- specific type of loan that is used to buy real estate • Credit Cards- entitle their holders to buy goods and services based on cardholder’s promise to pay for these goods and services

5. Interest • Is the price paid for the use of borrowed money • The amount borrowed is called the principal • Simple interest is interest paid only on principal- for example if you deposit $100 in a savings account at 5% simple interest, you will make $5/year • Suppose you leave the $5 in interest in your account, so you now have $105 • Compound interest is the interest paid on both the principal and the accumulated interest

6. Mutual Funds • An institution that sells shares to the public and uses the proceeds to buy a portfolio of stocks and bonds • Primary advantage of mutual funds is they allow people with small amounts of money to diversify (don’t put all your eggs in one basket) • Company operating mutual fund charges shareholders a fee each year (0.5% -2%)

7. Second Advantage of Mutual Funds • Give ordinary people access to the skills of professional money managers • Money managers pay close attention to the developments and prospects of the companies in which they buy stock