Features of Different Financial Products Lesson 1 – Bank Deposits

1. Features of Different Financial ProductsLesson 1 – Bank Deposits

2. Red Pocket Money • After the Chinese New Year, you have received a lot of red pocket money. What will you do with this money received?

3. Surplus Cash • If you have a surplus cash of $100,000, what will you do?

4. Financial Products • Financial products refer to instruments that help you save, invest, get insurance or get a mortgage. • These are issued by various banks, financial institutions (such as insurance companies) or government. • Financial products are categorised in terms of their type or underlying asset class, volatility, risk and return.

5. Types of Financial Products • The major types of financial products include: • Bank deposits • Insurance • Shares • Bonds/Debentures • Certificate of deposit

6. Bank Deposits • Money deposited in a bank account and can be withdrawn by the account holder. • The transactions of cash in/out are recorded on the bank's statements, and if the ending balance is recorded as a credit which means it is a liability of the bank owed to the customer. i.e. a debit balance means an overdraft by the customer. • The bank will pay the account holder interest on the funds deposited. • Major types of bank deposit: • Current account; • Savings account; • Term deposit

7. Bank Deposits • Current Account • A deposit account held by the customer for the purpose of issuing cheques for payment. • In general, there is no interest for money deposited in current account.

8. Bank Deposits • Savings Account • Money deposited in the saving account can earn interest income but such account cannot issuing cheques.

9. Bank Deposits • Time Deposit • Also called fixed deposit. • It is deposit at a bank for a preset period of time e.g. 3 months and cannot be withdrawn until the preset period is over. At maturity, a preset amount of interest will be earned. • The interest rate is higher than that of savings deposit. Three months

10. Activity 1 – Group Discussion • Discuss in a group of 3 to 4 under what situation will you place the money into the following three types of bank deposit. • Current account; • Savings account; • Term deposit Current Term deposit Savings

11. Activity – Solution

12. Hong Kong Deposit Protection Board • An independent statutory body formed under the Deposit Protection Scheme Ordinance to protect deposits placed in licensed banks in Hong Kong under the Deposit Protection Scheme (DPS). (Source: Hong Kong Deposit Protection Board)

13. What is the DPS Coverage? • All Hong Kong dollars, Renminbi or any other currency deposits held with the licensed banks in Hong Kong are protected. The maximum protection is up to HK$500,000 per depositor per bank, including both principal and interest. Source: http://www.dps.org.hk/index_EN.html

14. What is the DPS Coverage? • Types of deposits being protected by DPS: • Conventional deposits (e.g. savings accounts deposits, current account deposits and time deposits with a term not more than 5 years) • Deposits held by individuals (including joint account) or corporations • Secured / pledged deposits (e.g. deposit pledged to a bank for the purpose of obtaining a credit/loan facility from the bank) • When calculating the protected deposit amount, deposits in more than one account for the same person in the same bank will be combined. Source: http://www.dps.org.hk/index_EN.html

15. What are not under the DPS Coverage? • The following deposits are not protected by DPS: • Structured deposits (e.g. foreign currency or equity linked deposits) • Time deposits with a maturity longer than 5 years • Bearer instruments (a transferrable instrument which is payable to the holder on demand, e.g. bearer certificates of deposit) • Offshore deposits (e.g. deposits with overseas/mainland China offices of a licensed bank in HK) Source: http://www.dps.org.hk/index_EN.html

17. Features of Different Financial ProductsLesson 2 – Insurance Products

18. Insurance • Insurance helps the insured to transfer part of the risk he/she is facing to another (insurer i.e. insurance company). • Different types of insurance product provide different protections.

19. Why do we need Insurance? • Insurance transfers part of the risk we are facing • The risk still remains, but is now being shared with an insurer • Protection of assets • Protection against liability to third parties • Long-term investment (such as for retirement or education fund for children)

20. Classification of Insurance • There are five categories: • Insurances of the Person: protection on a person’s life or health. • Insurances of Property: protection on personal property such as buildings, motor vehicles, etc. • Insurances of Pecuniary Interests: protection on potential loss of wealth or future income such as business loss caused by catastrophe. • Insurances of Liabilities: protection on liabilities at law for the death, bodily injury or disease of third parties,or for loss of or damage to their property. • Investment-linked: protection on person’s life but with its policy value directly linked to the performance of its underlying investment.

21. Activity 1 • Can you name any kind of insurance products in Hong Kong?

22. Activity 1 – Answer • Life insurance • Medical insurance • Motor insurance • Travel insurance • Third-party liability insurance • Theft insurance • Investment-linked insurance • ……

23. Medical Insurance • Basic intentions and scope of cover • Medical insurances are intended to cover medical expenses arising from accidentor sickness. • However, medical insurance does not cover the followings: • Congenital conditions; • Pre-existing (i.e. prior to insurance) conditions and disabilities; • Infertility treatment; • Cosmetic surgery; • Routine medical examinations and check-ups; • Dental treatment.

24. Life Insurance • Basic intention of life insurance is to provide financial assistance for insured's family or dependents in the event of death, especially premature death (i.e. death occurring at such a time that financial hardship will likely be caused to the dependents). • Why do we need life insurance?

25. Needs for Life Insurance • Dependents’ living expenses; • Final (end of life) expenses; • Educational funds; • Retirement income; • Mortgage repayment fund; • Emergencies fund (usually needed to meet unexpected expenses); • Disability income.

26. Investment-linked Insurance • Investment-linked insurance policies are insurance policies with its policy value directly linked to the performance of its underlying investment such as stock and bond market. • This value may fluctuate according to the performance of the investments concerned. • All the investment risk is borne by the policyholder.

27. Activity 2 – Case Study • David is a 25-year-old designer in HK with an annual salary of HK$280,000.  He works hard and plays hard, and is quite used to borrowing money to buy his loved toys. • He currently has a $200,000 loan on his new car, a $50,000 loan on his digital camera and a personal loan of $80,000 which is for his other enjoyment. • David is far from ready to settle down, and is happy to rent an apartment.  He has no financial dependents and is happy living the single life. • Do you think David should have an insurance plan?

28. Activity 2 – Answers • Like many other young males David sees himself as being indestructible, but a insurance package which included $500,000 of life and medical insurance may help. • David certainly doesn’t expect to claim on his policy anytime soon, but he enjoys the peace of mind knowing that if something did happen to him his parents would not be burdened with having to repay his debts. • Of course David’s parents could sell his car and other belongings, but David knows that depreciation would make these assets worth far less than the money he owes on them. • David’s life insurance policy may just cost him few hundreds a month, but he’s happy knowing that the life insurance payout will save his parents from the considerable financial burden of repaying his debts and his recovery cost when he is serious ill.

30. Features of Different Financial ProductsLesson 3 – Other Financial Products

31. Shares • These represent ownership of a company. • While shares are initially issued by companies to finance their business needs, they are subsequently bought and sold by individuals in the stock market. • Returns on shares can be in the form of dividend payouts by the company or profits on the sale of shares in the stock market.

32. Bonds/Debentures • These are issued by companies to finance their business operations or by governments to fund budget expenses like infrastructure and social programs. • Example: iBond • Bonds have a fixed interest rate, making the risk associated with them lower than that with shares. • The principal or face value of bonds is recovered at the time of maturity.

33. Certificate of Deposit • A certificate of deposit (CD) essentially is a savings account with strings attached. You promise to keep your money in the bank for a certain length of time, and the bank promises to pay higher interest than for a regular savings account. • It entitles the holder to receive interest. A CD bears a maturity date and a specified fixed interest rate. • CDs are generally issued by commercial banks. Certificate of Deposit

34. Characteristics of Financial Products • Three characteristics are common to all financial products. They are yield, risk and liquidity. • Yield is the amount of cash the owners of a financial product receive or the rate of return on a financial asset. • Risk is the possibility of loss that may prevent adequate return on a financial product. • Liquidity is the ability of a financial product to be converted into cash. • Yield and liquidity are inversely related while yield and risk are directly related.

35. Activity – Group Discussion • In a group of 3 to 4 students to discuss the following issue. • If you have $1,000,000 surplus cash, how will you invest this fund? Why?