Banking, credit, savings & interest Flashcards
Canadian banking
- sell services
- profits earned from interest
- 1867 unified banking system
What are bank acts
rules & regulations
charted banks license to operate=s charted
classes of bank
Canadian banking classes
Schedule Definition Example
1 Canadian BMO
2 foreign-owned ING Bank
3 foreign-bank branches Citibank
What is brank banking?
Head office & branches
What is bank of Canada (stable economy)
- central bank
- money supply
- bank or prime lending rate
What does financial transactions mean
it is a company engaged in the business of dealing with financial and monetary transactions such as deposits, loans, investments, and currency exchange
What are 4 types of financial institutions
- banks (regular+virtual)
- Trust companies (investing)
- credit unions/caisee popularies
- insurance company
- life & health + property & cars
What are some Accounts types
- transaction (chequing)
- combination (transaction- savings)
- Current (business)
What are cheques
A written instruction to your bank (drawee) to take a specific amount of money out of your account (drawer) and pay it to a specified person (payee)
Cheques should be…
- dated
- signed
- indicate the amount in words & numbers
What are some ways to bank?
1) Branch
2) ABMS (1970)
3) Debit cards (1993)
4) telephone
5) online banking
What are some financial services
- Loan- borrow money ex auto, education
- lines of credit -authorisation [ permission to withdraw more money from your banking account than you have]
- credit cards
- using the banks money to make purchases, owe the bank not the business you by from - direct deposits- using the banks money to make purchases, owe the bank not the business you buy
- money orders & drafts- like cheque with guarantee that payment will be made, fees are charges for each money order/draft.
- night depositories-businesses to deposit money after closing hours.
- overdraft protection- insurance where if anything happens, the line of credit is paid off
- pre-authorised bill payments- direct withdrawals, ex insurances, mortgage, auto loans
- Safety deposit boxes
- Combination service packages- combines bank accounts, ex checking & savings.
- online banking- convenient 24/7 access deposits, bill payments, direct transfers, e-transfers.
Shop around…
- services offered
- location- convenience & accessibility
- fees- bank charges
- reputation
What are 2 types of financial institutions
schedule 1: banks are domestic and are authorised under the bank act to accept deposits
Schedule 2: banks are forging banks subsidiaries authorized under the bank to keep deposits
How are banks worth determined
assets, deposits and capitalisation
Canadian banking
all deposit-taking institutions invest & lend their customers’ savings & charge fees for services
- banks are business that sell financial services to earn profits
- most bank revenue is from interest on loaned money & investments [by bank
The bank act
-Canadian constitution of 1867 created a common unified banking system controlled by the federal government
-outlines rules & regulations-all banks must follow
-banks are known as charter banks
the license to operates as a bak is called a charter
What is charter
the license to operate as a bank is called a charter
3 classes of bank
schedule 1
-owned by Canadian shareholders (domestiv)- BMO, CIBC, Scotiabank
schedule 2- foreign-owned & operate similar to schedule 1 banks- ING bank
Schedule 3
-foreign-owned & have restrictions set by the bank act- Citibank, capital one
Bankers bank
- Stable economy by regulating the money supply
- controls bank rate-minimum interest banks can charge for loans
Other financial insitutions
- trust companies-started as investors, now similar to banks
- caisses poularies & credit unions- co-operative ownership, members have something in common & pool resources
- insurance companies- insure rise (life, health, property, etc), works by sharing risk, everyone pays in, only few are paid out
Opening and accessing and account
Documents:
2 pieces of ID required
ex birth certificate or citizenship, driver’s licence, passport.
Fill put a signature card banks keep this record of your signature
will receive a debit card
Deposit or withdrawal
can be made at…
- financial institution [bank] automated banking machine [ATM/ABM]
- mobile cheques deposit using bank app on your phone
- cash back at stores [withdrawal]
- need personal identification (pin)
Types of accounts
Transaction accounts (chequing account) used for everyday needs transaction register-own record of all transactions. Saving account - collect some interests combination- transactions+ savings depending on plan may have service fee [per month]
reconciliation
transaction register (your record ) &the monthly bank statment
(statment provided by bank) are compared to ensure they agree
- reconcile each month so you know current balance is correct i.e always check the deposits and withdrawals from your bank account o make sure thy are legitimate.
cheques
- written instruction to your bank to withdraw money from your account and pay it to specific person/buisness
- most written from a cheque book, but can be written on anything (special fee to process)
Cheque essentials
-date (indicates if cheque is stale or post-dated)
-payee (receives the cheque as payment for g/s)
-drawee (bank of person writing the cheque)
-drawer ( account holder- the person who writes the cheque)
amount [in number & words]
MICR number [ indicates institution, branch number, &account]
If you deposit a check,
your bank or check-cashing service is the drawee
Witting cheques
security features -inks that change colour when rubbed -watermarks -special fibres Stop payment request can be made if -not to be cashed -lost/stolen Cheque clearing processing of cheques & the settling of account balances. Magnetic ink character recognition (MICR) coded characters across bottom that are read t electronic cheque sorting machines.
Holds on cheques
deposited cheques can have a hold [delay] to give institution time to clear the cheque (check that fund are available)
-this means that you cannot withdraw the cheque amount until it has cleared i.e you don’t have access to the money.
Why care about inflation
- inflation erodes the value of money
- with 10% year inflation
- 100 today will only be worth 62 in 5 years and $39 in 10 years
- high inflation penalizes peopel who sae
- when inflation is high, it also tends to vary a lot from year to year
How does BoC control inflation
we control the interest rates charges amongst banks on ‘overnight’ loans
changes to this interest rate affects mortgage rates, car loan rates.
Saving
putting aside money to use in the future for example new computer, trip, car, education
Investing
using savings to earn extra income
for example interest, dividends [stock market]
Why save
- emergencies
- 3-5 months of gross income
- layoff, medical, loss of property
- cross income - goals (short vs long-term)
- security & future- retirement ( 10% of annual salary) pay yourself 1st
selecting a savings plan -criteria
1.earnings & yield
-rate of return (interest/principle *100)
rule of 72
2. safety
CDIC protects up to $100000 per a/c.
3. liquidity - ability to convert investment into $ & cash
What is the rate of return
Interest/ Principal x 100
Savings plans
saving accounts: safe earns interest- low
Term deposits & GICS; fixed amount, fixed time
RRSPs: retirement (not taxed)
RESPs: education 20% of %2000-max 400
Investments
1) Canada savings bonds (Govt. of Canada)
2) corporate bonds (company)
3. Stocks (shareholders)
4. mutual funds (pools of money-investment company)
5. real estate (land+ anything attached)
6. collectibles (items of personal intrest)
Business investments?
- Invest extra Cash
- Generate income
- strategy
- business (growth)
- suppliers (cut costs)
Where do i save/invest
3 criteria
probability of my investment- measure by return
what is credit
Buy now pay later!
- using someone else’s money
- creditor (lends money)
- debtor (borrows money)
Advantages of credit
- instant enjoyment
- convenience
- emergencies
- saving money
- credit rating
- records
Disadvantages of credit
- costs (Interest)
- overbuying
- impulse buying
- financial difficulties
Who borrows money
- individuals
- businesses
- government
Types of credit
- Credit cards
- instalment sales credit
- loans
Credit cards
Banks (ex: visa/Mastercard)
retailers
(ex: Canadian tire)
travel & entertainment (ex: Diners club, amex)
Instalment sales credit
-down payment+fixed regular payments
-finance charges+ purchase price
-contract [financing company & debt]
-buyer x own asset until fully paid off
lien against asset
asset serves as collateral
Loans
- terms (time)
- demand (collateral)
- student -education
- mortgage (property)
Cost of credit=s (interest)
-principal (amount borrowed)
-Term [time-ex year, months]
-interest rates [%p.a]
-interest cost
P x R x term
compounded
Cost of credit=s(interest)
Inflation & economic conditions determines interest rate, set by bank of Canada. -security or collateral asset-lien ex property, car, investments -Risk & credit rating based on 3Cs of credit history- credit bureaus ex eqifax, transunion
Credit worthiness
The 3 Cs of credit
- character
- capacity
- capital
Character
Borrower’s willingness:
repay on time
reliability
trustworthiness
Capacity
Borrower’s ability
- make payments on time
- pay when due
Capital
Value of borrower’s assets
How to know if your credit worthy
1.Credit bureaus
Gather credit info (7yrs) & sell it
Ex: equifax, transunion
credit worthy?
-Credit rating
level of risk: consumer, business, or government
-credit history-build
-credit file-check
