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Financial Intermediaries. Financial Intermediaries. Financial institutions which act as a “middleman” between lenders and borrowers Two most important are banks and mutual funds. Banks. Intermediary that people are most familiar with Main function is to bring together savers and borrowers
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Financial Intermediaries • Financial institutions which act as a “middleman” between lenders and borrowers • Two most important are banks and mutual funds
Banks • Intermediary that people are most familiar with • Main function is to bring together savers and borrowers • Personal saving helps the economy grow by providing funds for business investment
Other Functions of Banks • Also helps to facilitate purchases of goods and services by allowing people to write checks against their deposits • Store Money- FDIC insurance protects people from losing their money (up to $100,000) if the bank is unable to repay funds • FDIC encourages savings by guaranteeing the safety of most bank deposits • Saving Money-savings accounts, checking accounts, certificates of deposits (cds) • Loans • Mortgages- specific type of loan that is used to buy real estate • Credit Cards- entitle their holders to buy goods and services based on cardholder’s promise to pay for these goods and services
Interest • Is the price paid for the use of borrowed money • The amount borrowed is called the principal • Simple interest is interest paid only on principal- for example if you deposit $100 in a savings account at 5% simple interest, you will make $5/year • Suppose you leave the $5 in interest in your account, so you now have $105 • Compound interest is the interest paid on both the principal and the accumulated interest
Mutual Funds • An institution that sells shares to the public and uses the proceeds to buy a portfolio of stocks and bonds • Primary advantage of mutual funds is they allow people with small amounts of money to diversify (don’t put all your eggs in one basket) • Company operating mutual fund charges shareholders a fee each year (0.5% -2%)
Second Advantage of Mutual Funds • Give ordinary people access to the skills of professional money managers • Money managers pay close attention to the developments and prospects of the companies in which they buy stock