Function, Purpose and Regulation of Financial Institutions Flashcards
Deposit-Type Financial Institutions
provide traditional checking and savings accounts.
Non-Deposit-Type Financial Institutions
are financial institutions other than banks.
Offer the most services and branch offices to customers.
Commercial Banks:
Savings and Loan Associations:
Can be either mutual or corporate. Depositors earn dividends in a mutually owned S&L and interest in a corporate owned S&L. They loan most of the deposits out as mortgages.
____ are not-for-profit cooperatives, also owned by depositors. They have tax advantages over other types of banks.
Bank Services and Charges: To compete in today’s investment environment banks offer a wide variety of services to make it convenient to deposit and withdraw funds.
Credit Unions
FDIC insurance guarantees up to _____ of deposits per depositor per account type.
FDIC guarantees up to ____ for joint accounts for spouses.
$250,000
$500,000
Savings Bank:
Similar to a mutual S&L, they are mostly depositor owned.
______ insures deposits at commercial banks and S&Ls, and the National Credit Union Association (NCUA) insures credit unions. These are federal agencies established to protect you against failures involving financial institutions.
The Federal Deposit Insurance Corporation (FDIC)
_____ is a savings account alternative offered by commercial banks. Like a savings account, you can deposit or withdraw your money in a bank on-demand.
Money Market Deposit Account
Advantages and Disadvantages of a Savings Account
The advantages of a savings account are:
It is convenient - easily accessible and simple to operate. A fixed return is guaranteed.
The disadvantages are:
It is less liquid and therefore more risky than a checking account, in that you must go to the bank to withdraw your funds, and the bank could require a grace period before relinquishing the funds. It has a relatively low interest rates compared to other liquid investments.
Within a ____ S&L, depositors receive interest rather than dividends, just like in a commercial bank.
Corporate-
in a ____S&L, depositors are the owners. They receive dividends rather than interest on savings.
Mutual-
Banks serve two functions:
They take deposits and make loans.
Benefits of Credit Unions
Have a “cost” advantage over other financial institutions.
Are tax-exempt because of their “not-for-profit organizations” status.
Function on a smaller scale and are generally more efficient.
Pay more than depositors would otherwise earn at a commercial bank.
Have lower fees and minimum balances associated with their accounts.
The ____ is the percentage margin of collateral that must be maintained in the account for a securities purchase.
maintenance margin
____ are when investors purchase securities for full price, whereas investors with ____ leverage their position by borrowing money for their transactions from the brokerage firms.
Cash accounts
margin accounts
An is ____ a comprehensive financial service package offered by a brokerage firm, which can include a checking account, credit and debit cards, an MMMF, loans, automatic payment of fixed payments and a system for the direct payment of interest or dividends.
asset management account
____ allow investors to finance the purchase of a security. In doing so, the investor can magnify their return if the security appreciates in value.
Margin accounts
Federal regulation requires a _____ % initial margin. Some brokerage firms may require more. When a security drops in price causing the investor’s equity amount to go below the maintenance margin requirement, he or she will receive a margin call to make up the difference.
50%
Types of Brokers:
Full service, discount, and deep discount. They differ in the fees they charge and the level of advice/service provided.
Cost of Trading:
The cost of trading can be significantly different between full service and discount for large trades. Other charges to be aware of are inactive account and transaction fees.
Asset Management Account:
Some brokerage firms offer a multi-purpose account where investors can consolidate all of their financial needs, including banking and investing.
Online Trading:
There is a rising trend of self-directed investors using deep discount Internet brokers to facilitate their transactions.
Securities Investment Protection:
Provides coverage for investors in case of failure of the broker/dealer.
The major advantage of such an asset managment account is
that it automatically coordinates the flow of funds into and out of your money market mutual fund.
Each of the following are benefits of an automatic investment plan, except?
Direct deposits from your bank account
Move excess funds between accounts
Can establish automatic withdrawal
Which class of mutual fund shares typically has a contingent deferred sales charge?
Class B shares typically have a contingent deferred sales charge.
____ privileges associated with money market mutual funds are valuable when you need to use money directly from your investments to fund a large purchase or provide support during an emergency.
Check writing
A mutual fund ….
is an investment vehicle tended by professional managers that raises funds from investors by pooling their money and investing in stocks, bonds, and other asset classes. These investments are based on specific objectives and risk metrics.
Some funds designed for long-term investment charge ___ to discourage investors from leaving too early. The proceeds of the fee go back into the pool of investment for the other shareholders.
redemption fees
Load fees for mutual funds are based on a percentage of the Net Asset Value (NAV). what is the calculation?
NAV = (Total value of the fund’s assets - liabilities) ÷ number of outstanding shares.
Loaded Funds will charge ____ for the purchase, and sometimes sale, 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).
commission
Finally, some funds charge a ____ to compensate for the distribution and marketing of the fund.
12b-1 fee
An ____ plan allows an investor to take advantage of investing small amounts on a systematic basis to a mutual fund account from their bank account, or to set up a regular distribution to pay off a bill or to supplement their income.
automatic investment
Automatic Investment and Withdrawl Plans
Make regular deposits directly from your bank account.
Employ dollar-cost averaging (DCA) when investing in a mutual fund.
Move excess funds from a money market account into the stock market.
Withdraw a dollar amount or a percentage of your mutual fund account on a monthly basis under an automatic or systematic withdrawal plan.
The ____ allows an investor to transfer their investments among a company’s different funds
exchange privilege
All _____ charge a management fee as compensation for managing the fund.
mutual funds
_____ underwrite securities sold by companies in the primary market.
Investment Banks
_____ sometimes known as Investment Management Firms, advise or manage mutual funds, pension funds or other pools of assets. Their clientele include individuals, companies, and governments.
Asset Management Firms
Which of the following financial institutions help companies raise capital?
investment Banks.
Venture Capital Firms
____ raise funds for start-up companies
Venture Capital Firms
Each employee has an account into which the employer, and usually the employee, make regular contributions. The employee defines how much is put into the plan. At retirement, the employee receives a benefit whose size depends on the accumulated value of the funds in the retirement account.
Defined contribution-
The employee’s pension benefit is determined by a formula that takes into account years of service to the employer. In most cases, it also includes salary or wages. The amount the employee receives is defined for him or her. The most common formulas used to determine the benefit are flat amount, flat percentage, and unit credit.
Defined benefit-
Pension and Retirement Funds have 2 plans
Defined contribution
Defined benefit
____ are firms whose primary function is to help businesses, governments, and other entities raise funds to finance their activities by issuing securities. Investment banks also facilitate, and sometimes initiate, mergers of firms or acquisitions of one firm by another.
Investment banks
___ are financial institutions that may be associated with, or owned by, a commercial bank. They provide a wide range of services to individuals and corporations.
Trust companies
____ can act as fiduciaries for the trust beneficiaries.
trust departments
The _____ is the primary investigator and prosecutor of insider trading.
SEC
The SEC NOT have jurisdiction over___
Credit Unions
_______ main function is to promote economic stability by preventing a breakdown in part or all of the financial system. Some of their functions include, guaranteeing farmers’ debt instruments, guaranteeing loans to students, and protecting bank accounts.
Special-purpose intermediaries’
The logic behind dollar cost averaging is that by investing the same dollar amount on a regular basis, more mutual fund shares are purchased when the price is low and fewer are bought when the price is high.
Dollar Cost Averaging (DCA) approach.
Interest-bearing checking account is a negotiable order of withdrawal _____ account. These ___ accounts are simply checking accounts on which you earn interest on your balance.
NOW
NOW
The governing federal insurance law is the ______ which turns over the regulation of the insurance industry to the states.
McCarran-Ferguson Act of 1945 (Public Law 15)
A savings account is also called a ___ or ____ account.
time deposit
a passbook
______ execute the country’s monetary policies, including manipulation of interest rates and money supplies.
Central banks (the Fed)
Structure of the Federal Reserve System
Board of Governors
FOMC
Board of Directors
Reserve Banks
____ is a self-regulatory body that operates subject to Securities and Exchange Commission oversight,
Financial Industry Regulatory Authority (FINRA).
Regional and World Organizations
Several international bodies currently exist for the purpose of coordinating the financial policies of national governments.
The most important is Bank for International Settlements (BIS) in Basel, Switzerland, whose objective is to promote uniformity of banking regulations.
two official international agencies operate in the international financial markets to promote growth in trade and finance:
the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (World Bank).
______ is issued when the current account value falls below the required minimum overall level?
Minimum Equity Call
