Chapter 5 - Banking Services and Managing Your Money

Question 1

Money management

Answer 1

• describes the decisions you make over a short-term period regarding your income and expenses

Question 2

Main sources for savings and credit

Answer 2

• positive net cash flows from the personal cash flow statement
• credit cards and/or lines of credit from financial institutions

Question 3

Why is liquidity necessary

Answer 3

• there will be periods when your income is not adequate to cover your expenses
• you should have between 3 and 6 months worth of expenses in a savings account (emergency fund)

Question 4

Depository institutions

Answer 4

• accept deposits from and provide loans to individuals and businesses
• three types = chartered banks, trust and loan companies, credit unions and caisses populaires

Question 5

Non-depository institutions

Answer 5

• do not offer federally insured deposit accounts but provide other services
• 8 types = finance and lease companies, mortgage companies, investment dealers, insurance companies, mutual fund companies, payday loan companies, cheque cashing outlets, pawnshops

Question 6

Chartered banks

Answer 6

• accept deposits in chequing and savings accounts and use the funds to provide business and personal loans
• federally incorporated

Question 7

Eligible deposits

Answer 7

• chequing accounts, savings accounts, term deposits, GICs, money orders, bank drafts, certified cheques
• include those deposits that are payable in Canada and in Canadian currency
• insured up to $100 000 by CDIC (only for chartered banks)

Question 8

Schedule I banks

Answer 8

• domestic banks that are authorized to accept deposits

- 6 largest = RBC, TD, Scotiabank, BMO, CIBC, National Bank of Canada

Question 9

Schedule II banks

Answer 9

• foreign banks that have subsidiaries operating in Canada
• authorized to accept deposits
• restrictions on asset growth and lending activities depending on the local capital bases
• not really used for personal banking

Question 10

Schedule III banks

Answer 10

• subsidiaries of foreign banks that are restricted in their authority to accept deposits

Question 11

Financial conglomerates

Answer 11

• offer a diverse set of financial services to individuals or firms
• eg. wealth management, insurance, personal/commercial banking, investor & treasury services, capital markets

Question 12

Trust and loan companies

Answer 12

• in addition to providing services similar to a bank, can provide financial planning services
• trust = legal agreement that provides for the management and control of assets by one party for the benefit of another
• banks own a large number of trust companies

Question 13

Credits unions

Answer 13

• also known as caisses populaires
• provincially incorporated co-operative financial institutions that are owned and controlled by their members
• eligible for deposit insurance protection (DICO in Ontario)
• do not operate outside provincial boundaries
• don’t pay income tax and can therefore offer more competitive rates

Question 14

Finance and lease companies

Answer 14

• non-depository
• specialize in providing personal loans or leases to individuals
• eg. cars, airplanes

Question 15

Mortgage companies

Answer 15

• non-depository
• specialize in providing mortgage loans to individuals
• fill the gap for customers who are not served by banks (eg. self employed)

Question 16

Investment dealers

Answer 16

• non-depository
• facilitate the purchase or sale of various investments by firms or individuals
• asset management
• provide investment banking and brokerage services

Question 17

Insurance companies

Answer 17

• non-depository
• sell insurance to protect individuals or firms from risks that can incur financial loss
• eg. life, health, property, casualty

Question 18

Mutual fund companies

Answer 18

• non-depository
• sell units to individuals and use the proceeds to invest in securities to create mutual funds
• individuals become part owners of the portfolio

Question 19

Payday loan companies

Answer 19

• provide single payment, short-term loans

- based on personal cheques held for future deposit or electronic access to personal chequing accounts

Question 20

Cheque cashing outlets

Answer 20

• cash third-party cheques immediately

- eg. Money Mart

Question 21

Pawnshops

Answer 21

• provide small, secured loans for a fee

- usually require a resaleable item worth more than the loan as a deposit (security)

Question 22

Chequing services

Answer 22

• draw on funds by writing cheques against your account
• allows you to not carry much cash when making purchases
• very little interest accrues on these funds

Question 23

Debit cards

Answer 23

• a card that is used for identification at your bank
• allows you to make purchases that are charged against an existing chequing account
• has the same result as writing a cheque

Question 24

Cheque register

Answer 24

• a booklet in your cheque book where you record the details of each transaction you make (deposits, cheque writing, withdrawals, bill payments)

Question 25

Overdraft protection

Answer 25

• protects customers who write cheques for amounts that exceed their chequing account balances
• short-term loan from the depository institution where the chequing account is maintained
• can lead to high interest rates, one-time fees, and monthly fees

Question 26

Stop payment

Answer 26

• a financial institution’s notice that it will not honour a regular monthly automatic withdrawal
• usually occurs in response to a request by the account owner

Question 27

Online banking

Answer 27

• allows a customer to check the balance of bank, credit card, and investment accounts
• transfer funds, pay bills electronically, and perform a number of tasks

Question 28

Interac e-Transfer

Answer 28

• money comes out of your account and is transferred immediately to the recipient once they answer a security question

Question 29

Credit card financing

Answer 29

• individuals use credit cards to purchase products and services on credit
• at the end of each billing cycle, you receive a bill for the credit your used over that period

Question 30

Safety deposit box

Answer 30

• a box at a financial institution
• customers can store documents, jewellery, and other valuables
• it is secure because it is stored in the bank’s vault

Question 31

Automated banking machine (ABM)

Answer 31

• also known as ATMs

- a machine that individuals can use to deposit and withdraw funds at any time of day

Question 32

Certified cheque

Answer 32

• a cheque that can be cashed immediately by the payee without the payee having to wait for the bank to process and clear it

Question 33

Money orders and drafts

Answer 33

• products that direct your bank to pay a specified amount to the person named on them
• tend to be used for smaller amounts of money

Question 34

Traveller’s cheque

Answer 34

• a cheque written on behalf of an individual that will be charged against a large, well-known financial institution or credit card sponsor’s account
• no payee is designated on the cheque

Question 35

Selecting a financial institution

Answer 35

• depends on convenience, deposit rates and insurance, and fees
• web-based financial institutions tend to pay a higher interest rate on deposits
• avoid financial institutions that charge high fees on services you will use frequently

Question 36

Term deposit

Answer 36

• short-term or long-term investments
• cashable
• for individuals who do not know when they will need access to their funds, but want an interest higher than savings accounts

Question 37

GICs

Answer 37

• issued by a depository institution that specifies a minimum investment, an interest rate, and a maturity date
• less liquid than funds in a savings account or term deposit
• GICs with longer terms offer higher annualized interest rates

Question 38

Canada Savings Bonds

Answer 38

• short-term to medium-term

- high-quality debt securities issued by the Government of Canada

Question 39

Money market funds

Answer 39

• accounts that pool money from individuals and invest in securities that have short-term maturities, such as one year or less
• not insured, but most have a very low risk of default