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Banking & Finance Final Exam Review
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medium of exchange
an agreed-upon system for measuring the value of goods and services.
financial intermediary
a bank is this for the safeguarding, transferring, exchanging, or lending of money.
Commercial banks
are the institutions commonly thought of as banks
Retail Banks
this and other thrift institutions such as mutual savings banks, savings and loans, and credit unions, developed to help individuals not served by commercial banks
Central banks
the government banks that manage, regulate, and protect both the money supply and the banks themselves.
merger
occurs when one or more banks join or acquire another bank or banks.
identity theft
occurs when someone achieves financial gain by using another person's personal information to unlawfully assume the identity of the other person.
creditworthy
a customer that has a good credit rating, sufficient collateral for loans, and an ongoing income source sufficient to make timely loan payments.
depositers
people who put money into banks
spread
the difference between what a bank pays in interest and what it receives in interest. Also known as net interest income
revenue
income
Pofit
net income
asset
anything of value
liquid asset
anything that can be readily exchanged, like cash
liability
cash obligation
Return on assets(ROA)
the ratio of net income to total assets
Return on equity(ROE)
measures how well a bank is using its equity
equity
represents net assets, or total assets, minus total liabilities
niche markets
targeting particular customers in defined locations or by particular services.
deregulation
loosening of government control
Automated Teller Machines
a machine that can perform almost any banking action
Smart Card
are credit, debit or other types of cards that have embedded microchips
payroll card
a card where banks can facilitate salary payments between employers and employees
online banking
allows customers to perform banking transactions from their home computers
mobile banking
customers can execute a variety of banking transactions with mobile phones
currency
all media of exchange circulating in a country
bank currency
bank notes
deposit currency
a form of this is checks
Federal Reserve Act
created a system to stabalize the banking system
reserves
percentages of deposits that are set aside to help with liquidity drops
reserve liquidity
ways to convert the reserves readily to cash
margin
stocks bought for a fraction of their price, then resold for profit without the full purchase price of the stock ever being paid
bank run
when many people try to withdraw their money at once
Federal Deposit Insurance Corporation (FDIC)
guarantees deposits against bank failures up to $100,000 per depositor, per bank and sometimes even more for special kinds of accounts or ownership categories.
stagflation
when inflation rises but the economy as a whole is not doing well
recession
decline in total production lasting a minimum of two consecutive quarters
member bank
any bank that is part of the federal reserve system
District reserve bank
carry out banking functions for government offices in their area, examine member banks in their district, decide whether to loan bank funds, recommend interest rates, and implement policy decisions of the board of governors
federal funds rate
the rate at which banks borrow from eachother
Federal open Market Committee (FOMC)
makes discount rate decisions
inflation
when rising prices decrease the value of money
Truth in Lending Act
Title 1 of the consumer credit protection act guarantees that all information about costs of a loan
Equal Credit Opportunity Act
prohibit the use of race, color, religion, national origin, marital status, age, reciept or public assistance, or exercise of any consumer right against a lender as a factor in determining creditworthiness
Fair Credit Reporting Act
aims to protect the information that credit bureaus, medical information companies, and tenant screening services may collect.
Fair Debt Collection Practices Act
protects customers from unfair collection techniques
charter
legal approval to operate a business as a bank
CAMELS system
Capital adequacy, Asset adequacy, Management, Earnings, Liquidity, and Sensitivity
ROCA score
a composite score of performance in risk management, operational controls, compliance, and asset quality
fixed exchange rate
a monetary valuation of one country's currency is tied to the valuation of another country's currency
flexible exchange rate
enables currencies to fluctuate based on market conditions
balance of payments
record of all of the exchanges of goods and services that occur between two countries
Federal Reserve System Open Market Account
the account the fed maintains international reserves in is the...
money supply
is defined as the liquid assets held by banks and individuals
liquidity
is a measure of how quickly things can be converted to something of value like cash
commodity money
based on some item of value
Fiat money
money that is deemed legal tender by the government, and it is not based on or convertible into a commodity
fractional-reserve system
where one keeps back or reserves only a fraction of the total gold that had been deposited
primary reserves
consists of vault cashand the required percentage amounts on deposit in the Federal Reserve District Bank
vault cash
cash on hand
secondary reserves
including securities the bank purchases from the federal government, and deposits that are due from other banks
excess reserves
reserves held by a bank beyond its reserve requirement
multiplier effect
new deposits go out to customers as loans and create more deposits, thus expanding the amount of money in the system
federal funds rate
amount of interest charged for short-term, interbank loans
discount rate
interest rate that the federal reserve sets and charges for loans to member banks
prime rate
rate that the banks charge their best and most reliable customers
transaction account
an account that allows transactions to occur without restrictions on the frequency or the volume of transactions
demand deposit
payable on demand whenever the depositor chooses
individual account
owned by one person
joint account
2 or more owners
Check 21
created a new category of negotiable instrument
time deposits
deposits that are held for or mature at a specified time
Money Market deposit accounts
offer a higher rate of interest than savings accounts, but they usually require a higher initial deposit to open an account
Certificates of deposit
certificates issued by banks that guarantee the payment of a fixed interest rate until the maturity date
maturity
which is a specified date in the future
interest
price paid for the use of money
compound interest
adding interest to the principal and paying interest on the new total is called ""
Annual Percentage rate
nominal rate on which interest
negotiable instrument
a written order or promse to pay a sum of money, either to a specified party or to the person who holds it
endorsing
signing your name on the back of the check
payee
reciever of the funds
identification numbers
check number, bank number, and account number
drawee
bank that maintains the account and holds the funds of the person or business that is writing the check
drawer
person who is writing the check
draft
an order signed by one party that is addressed to another party
bill of exchange
a negotiable and unconditional written order, such as a check, draft, or trade agreement, addressed by one party to another
promissory note
a written promise to pay at a fixed or determinable future time a sum of money to a specified individual
holder in due course
a written, signed unconditional promise or order to pay a fixed amount on demand or at a defined time to ""
blank endorsement
signature of the holder
restrictive endorsement
limits the use of the instrument to a means specified by the endorser
full endorsement
transfers the check to another party
qualified endorsement
an attempt to limit the liability of the endorser without limiting an instruments further negotiability
transit number
a 9-digit number that identifies the bank that holds the checking account and is responsible for payment
returned check
a check written on an account that doesnt have adequate funds
charge cards
a consumer purchases but must pay the account in full at the end of the month
credit cards
allow consumers to pay all or part of their bills each month and finance the unpaid balance
cash cards
commonly used at an ATM
debit cards
transfer money from a persons designated account to the account of the retailer
Asset Transformation
using deposits to generate revenue by putting deposits to wrk via loans
adverse selection
concept that the borrowers who are most willing to accept a high interest rate are the same borrowers who are most likely to default on their loans
captive borrower
a consuemer with a weak credit history that can easily get a loan
moral hazard
when a borrower takes greater risks if they think the harm they will incur from those risks will somehow be minimalized
credit rationing
when banks refuse to provide a loan or when they lend less than the customer requested
installment loan
loan for which the amount of the payments, the rate of interest, and the number of payments are fixed.
personal loans
loans that dont require that a specific purpose be stated
secured loan
one in which some item of value backs the loan incase the borrower defaults on the loan
collateral
item that secures the loan
lien
a legal claim to the property to secure the debt
unsecured loan
a loan backed only by the reputation and creditworthiness of the borrower
grace period
an amount of time you have to pay the bill in full and avoid any finance charges
closed ended loan
a set amount, to be paid back in equal regular payments
subprime rates
higher than normal to offset the increased risk represented by a less-than-perfect borrower
consumer reporting agency(CRA)
a company that compiles and keeps records on consumer payment habits and sells these reports to banks to calculate creditworthiness
FICO score
a 3 digit number that credit granters can use in making a loan approval decision
revolving credit
a line of credit that has a maximum limit
sum-of-digits method
takes the total finance charge, divides it by the number of months in the loan term and assigns a higher ratio of interest to the early payments
previous balance method
take amount owed at beginning and calculate interest from that
adjusted balance method
subtract payments made during the billing cycle
average daily balance method
balances for each day are added and divided by number of days in billing cycle to yield an average figure on which the finance charge is calculated
predatory lending
occurs when lenders create problems for consumers by making credit too easily available without regard to the borrowers ability to pay
liquidity risk
risk that a bank will have to sell its assets at a loss to meet its cash demands`
credit risk
the banks estmate of the probability that the borrower can and will repay a loan with interest as scheduled
market risk
risk that investment wuill decrease in price as market conditions can change
mortgage origination
new morgtages
mortgage
a note, usually a long-term, secured by real property.
foreclosure
court-ordered sale of the property
fixed rate mortgages
loans with fixed interest rate for the life of the loan
balloon mortgage
interest and payment are fixed but at sme specific point the entire remaining balance of the loan is due in one single balloon payment.
adjustable rate mortgages(ARMs)
are those with rates that change over the course of a loan
buy-down mortgage
the borrower buys down, or prepays, part of the interest in order to get a lower rate.
point
value equal to 1% of the loan
PITI
principal, interest, taxes and insurance
escrow
minimum amount payed in advance
loan-to-value
value of loan compared to value of the asset
redlining
banks refusing to lend to certain neighborhoods
Fannie mae
federal national mortgage association
negative equity
when amount owed on a home is more than current value on a home
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Mrs. Arbaugh
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Personal and Business Finance Dobyns-Bennett High School
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