Chapter 6 - financial institutions Flashcards
What is a bank?
A type of financial institution.
What services do financial institutions provide?
- A safe place to keep money.
- To help people make payments.
- Lending money.
How do banks make a profit?
- By making loans to people. Banks accept deposits and then make loans using this money. They make a profit on these loans by charging a higher rate of interest on their loans than the interest they pay to the depositors.
- By charging fees for services like withdrawing money from an ATM.
- By investing money into shares and potentially receiving capitsl gains and dividends.
What are the types of bank accounts?
- Cheque account/current account
- Savings account
- Term deposit
What is a cheque account/current account?
Where money is readily available by writing a cheque. Can also be operated by using a debit card.
What is a savings account?
A bank account which allows people to save money and earn interest.
What is a term deposit?
Where money is saved for a set time called the term. It earns the highest rate of interest but if money is withdrawn early the interest is reduced.
What are three types of loans?
- Overdrafts
- Personal loans
- Mortgage
What is an overdraft?
This allows a person to use more money than they have in their cheque account up to an agreed limit.
What is the function of an overdraft?
To pay unexpected bills usually.
What is a personal loan?
A loan for a set amount of time that is repaid plus interest by the end of the term.
What is a mortgage?
A long term loan used by individuals and firms to buy property (land and buildings). The property is used to secure the loan so if the loan cannot be paid back the property will be sold to cover the debt.
What are five methods of payment?
- Cash
- Cheques
- Debit or eftpos card
- Direct debit
- Credit card
How is using cash a method of payment?
Cash includes using notes and coins. Banks allow cash to be readily available through ATM’s (automatic telling machines).
How is using cheques a method of payment?
Cheques are a written instruction to a back to pay a certain amount of money from your account to the account of the person you are paying. Cheques are not legal tender so may not always be accepted.
How is using a debit or eftpos card a method of payment?
These are electronic methods of payment, if there are not enough funds in an account, then the transaction will be declined.
How is using direct debit a method of payment?
Where your bank pays money on your behalf such as regular bills for a phone or electricity.
How is using a credit card a method of payment?
This provides a short-term loan. The bank pays the money for you but you have to repay them. There is usually an interest free period of around one month.
What are three types of banks?
- Commercial banks
- Savings banks
- Investment or merchant banks
What are commercial banks?
These types of banks operate for consumers and businesses. They usually have a number of branches and normally provide services like:
- accepting deposits
- providing loans
- helping with payments
What are investment/merchant banks?
Banks that specialise in helping large businesses raise finance and provide investment banking services.
What do finance companies do?
Usually specialise in hire purchase lending.
What are building societies?
Specialise in lending for income ownership and other property.
What are venture capitalists?
Specialise in providing finance for new and risky business ventures usually in return for some business ownership. This type of finance is called venture capital.
