Chapter 20: Types of Savings and Savings Products

Question 1

Cash Currency Savings

Answer 1

Oldest form of savings
Some people don’t trust bank systems and still use cash, or wish to hide cash from the tax dept

Question 2

Cashless currency savings

Answer 2

Savings in a bank account

Characteristics
* Security
* Demandability
* Interest earnings

Question 3

Security

Answer 3

Saver has claim against the bank for the full amount of the balance, amount is guarenteed. Investments are not guarenteed.

Security is ensured through DNB and the guarentee scheme for EEA small businesses and retail customers.

Question 4

Demandability

Answer 4

Bank has to pay out the balance on demand
Some banks will have minimum balance requirements or withdrawl fees

Question 5

Interest earnings

Answer 5

Bank will pay interest on savings
* Simple interest = bank pays interest once per year
* AKA nominal interest = theoretical interest on annual basis
* Value of balance will go down due to inflation

Question 6

Savings Products: Payment Account

Answer 6

Is a sort of savings acount where people get their salary etc. Very little return or no return.
* Bank charges a fee to use the account
* Can transfer/receive money to other accounts
* Can be negative (not possible with a savings account)

Question 7

Savings account with on-demand withdrawl

Answer 7

Withdraw at any time
Includes:
* Ordinary savings account
* Savings with a minimum deposit or withdrawal restrictino
* Savings account in foreign currency

Question 8

Ordinary savings account

Answer 8

Most flexible
IR is variable - follows current IR
Bank always has to have this cash at hand

Question 9

Savings account with a minimum deposit or withdrawal restriction

Answer 9

Subject to restrictions
Examples:
* Minimum balance of 1000
* Withdrawl minimum
* Charges for large withdrawls
* Bonus interest on lowest balance
* Bonus interest if balance increases by 10%

Question 10

Savings account with tiered IR

Answer 10

linked to size of balance
Ideal for large deposits
* One type pays a higher IR only for amounts above a threshhold
* One type will apply to the entire balance if over the threshhold

Question 11

Savings account in foreign currency

Answer 11

Can benefit from higher IR in foreign currencies or FX rates

Question 12

Savings product with non-immediately available balance

Answer 12

• Fixed-term savings
• climbing interest rate savings
• Savings certificate
• Climbing interest rate savings certificate
• Deposit account

Question 13

Fixed-term savings account

Answer 13

Bank and saver sign agreement on duration (e.g. 1-10 years)
fixed IR is offered and freqency of payment is determined (e.g. quarterly)

Possible to make extra deposits

Question 14

Climbing interest rate savings account

Answer 14

variant of savings account with a fixed term e.g. 5 or 10 years
* Interest rate will increase each year
* minimum balance usually applies
* Can terminate prematurely for a fee

Question 15

Savings Certificate

Answer 15

Paper or equity instrument with a term of 1 to 15 years
Fixed IR over term
Cannot be sold or traded
Range from 500 to 5000

Question 16

Climbing interest rate savings certificate

Answer 16

Registered certificate with fixed denomination.
Max of 5 years

Question 17

Deposit account

Answer 17

Savings to be left untouched
1 to 20 years
IR is fixed
500 to 25000 minimum deposits

Question 18

Savings for specific groups

Answer 18

• Young person = Savings for children - helps build loyalty, some pay a higher IR or bonus
• Ethical savings = bank converts funds to credit facilities for ethical purposes
• Green savings = used to finance project to contribute to renewable energy etc with tax advantages.