Financial Institutions Function and Purpose

Question 1

Commercial Bank

Answer 1

offer a variety of financial services, including checking and savings accounts, credit cards, safety deposit boxes, financial consulting and all types of lending services.

Question 2

Savings and Loan Associations (S&Ls), or Thrifts

Answer 2

are similar to banks. They borrow money from depositors and primarily lend this money out in the form of home mortgages. With a mutual S&L depositors receive dividends rather than interest on savings. With a corporate S&L, depositors receive interest rather than dividends, just like in a commercial bank. Savings and Loan Associations are regulated by federal agencies such as the FDIC, OCC, Consumer Finance Protection Bureau and the Federal Home Bank Board and state agencies if they are state chartered institutions.

Question 3

Savings banks

Answer 3

are depositor-owned, basically making them mutual savings banks. They pay dividends rather than interest to their depositors/owners. Like S&Ls, their primary purpose historically has been to provide mortgage funding to their depositors. In fact, in recent years many S&Ls have changed their charter and name and have become savings banks. The federal Financial Stability Oversight Council examines federal and many state-chartered thrift institutions, which include savings banks and savings and loan associations

Question 4

Community banks

Answer 4

have less than $1 billion in assets, according to the FDIC, and control 70% of the deposits in rural counties. Loans are much less likely to default when compared with loans made from urban banks to urban borrowers, and the banks may charge lower fees.

Question 5

Credit unions

Answer 5

are another type of depositor-owned financial institution. They are “not-for-profit cooperatives” with a membership requirement. Credit unions are quite similar to commercial banks and S&Ls, and offer a wide range of competitive financial services. However, unlike banks which can raise capital by issuing bonds or selling shares, credit unions raise capital by retaining earnings.

Question 6

NOW Account (Negotiable Order of Withdrawal)

Answer 6

These NOW accounts are simply checking accounts on which you earn interest on your balance.

Question 7

Money Market Deposit Account (MMDA)

Answer 7

A money market deposit account (MMDA) is an alternative to the savings account offered by commercial banks. It works about the same way as a savings account. You can deposit or withdraw your money in a bank whenever you want to. MMDA is a market interest rate sensitive bank account that invests in money market instruments such as commercial papers, T-bills, repurchase agreements, and so on. Therefore, it offers account holders a competitive yield as money market mutual funds along with Federal Deposit Insurance Corporation insurance.

Question 8

Online Lending

Answer 8

This concept is person-to-person lending. Several internet loan companies, such as Prosper Marketplace, Lending Club, and Upstart Personal Loans are in the business of matching people who need small personal loans with investors who are willing to be their lenders

Question 9

Full Service Brokers

Answer 9

take buy and sell orders, extend margin credit to customers, hold the clients’ securities in safekeeping, and collect cash dividends. Most importantly, they also provide free investment research and offer comprehensive investment planning advice and services.

Question 10

Discount brokers

Answer 10

simply take orders from their clients; they furnish little or no investment advice. If the discounters provide any investment research, it will likely be in the form of published reports from Moody’s or Standard & Poor’s. Like most brokers, the discounters extend margin credit, hold clients’ securities in safekeeping, and accumulate the client’s cash dividends and interest income.

Question 11

Deep discount brokers

Answer 11

or electronic brokers take buy and sell orders over the Internet. Most provide no investment advice. The investor/client might not even speak with a human as a self-service transaction is executed. Some electronic brokers provide printed investment research. If so, it might be free or there may be a modest charge.

Question 12

Margin account

Answer 12

with a margin account, both you and your broker put in $500 to purchase $1,000 worth of stock. The broker then charges you the prime rate (the rate commercial banks charge their most creditworthy customers, such as large corporations for loans) plus a 1 to 2 percent service fee.

Question 13

Asset Management Account

Answer 13

An asset management account is an account with a comprehensive financial services package offered by a brokerage firm that could include a checking account; a credit card; a money market mutual fund; loans; automatic payment on any fixed debt (such as mortgages); brokerage services (buying and selling stocks or bonds); and a system for the direct payment of interest, dividends, and proceeds from security sales into the money market mutual fund.

Question 14

Redemption Fee

Answer 14

Some funds charge redemption fees to discourage investors from leaving a fund designed for long-term investment too early. The proceeds of the fee go back into the pool of investment for the other shareholders.

Question 15

Loaded Funds

Answer 15

Loaded Funds will charge a commission for the purchase (and sometimes for selling) of the fund’s shares. These loads could be charged in the beginning (Front Load), annually (Level Load), or when the shares are sold within a certain time (Contingent Deferred Sales Charge or Back Load).

Question 16

Class A shares

Answer 16

Front laoded

Question 17

Class B shares

Answer 17

contingent deferred sales charge

Question 18

Class C shares

Answer 18

Level loaded

Question 19

NUA account

Answer 19

Nett Unrealized Appreciation account. Used to move stock that have gained value in 401K to NUA account. The taxable event is the cost basis on year 1 and capital gains when assets are sold.