Financial instutions

Financial instutions

Definition

The main function of financial institutions is to ease the flow of money from users with surpluses to those with deficits.

They act as intermediaries between savers and borrowers and they direct the flow of funds between them. 

Types of financial institutions

the most common types of financial institutions are:

- deposit institutions (banks that accept deposits, including commercial banks, savings banks, and credit unions.)

- non deposit institutions which provide financial services but don’t accept deposits, including finance companies, insurance companies, brokerage firms, and pension funds.

Commercial banks

–company that accepts deposits that it uses to make loans, earn profits, pay interest to depositors, and pay dividends to owners.

Each bank is receiving big portion of income from interest on loans payed by borrowers.

Banks are giving the lowest rate or prime rate to their creditworthy customers.

Savings and Loan Association (S&L)

-financial institution accepting deposits and making loans primarily for home mortgages.

Most S&L associations were created to encourage saving habits and provide financing for homes.

Mutual Savings Bank 

–financial institution where all depositors are considered like owners of the bank, sharing profits. All profits are divided proportionately among depositors.

Credit Union 

nonprofit, cooperative financial institution owned and run by its members, usually group of employees, members of a particular organization or people in one community.

Reason of credit unions is to provide members save place to save money and borrow at reasonable rate. Members investing in order to make loan to one another.

Non-deposit Institutions

Pension Fund 

–non deposit pool of funds managed to provide retirement income for its members

Insurance Company 

–non deposit institution that invests funds in stock, real estate and other asset. Funds are collected from premiums charged for insurance coverage.

•Finance Company 

–non deposit institution that specializes in making loans to businesses and consumers

•Securities Investment Dealer (Broker)

–financial institution that buys and sells stocks and bonds both for investors and for its own accounts

Multiple Choice

What type of non deposit institution will buy and sell stocks and bonds on behalf of clients?

• Securities investment dealers

• Pension funds

• Insurance companies

• Finance companies

Multiple Choice

Which of the following affects the value of money?

• How much currency is in circulation

• How many units the currency can be divided into

• How portable the form of currency is

• How durable the form of currency is

Multiple Choice

Which of the following financial institutions earn profits from loans taken from the funds in each of its depositors' accounts?

• Pension funds

• Credit unions

• Securities investment firms

• Commercial banks

Multiple Choice

Which of the following financial institutions are considered to be owned by their depositors?

• Commercial banks and savings and loan associations

• Savings and loan associations and mutual savings banks

• Mutual savings banks and credit unions

• Pension funds and savings institutions

Multiple Choice

Which of the following reasons is the primary motivator for a commercial bank to acquire new depositors?

• A new deposit account will make more funds available to pay the bank's employees

• A new deposit account will make more funds available to facilitate brokerage transactions.

• A new deposit account will make more funds available to give out in loans.

• A new deposit account will make more funds available to give out in dividends to its investors.

Multiple Choice

Which of the following represents a pool of managed funds that provide retirement income for members?

• Pension funds

• Insurance companies

• Finance companies

• Securities investment dealers

Multiple Choice

What is the interest rate offered by banks to only their most creditworthy commercial customers?

• Fixed

• Prime

• Variable

• Super

Multiple Choice

What types of firms lend to businesses needing capital or long-term funds?

• Insurance companies

• Finance companies

• Pension funds

• Securities investment dealers