What are those with surplus money called?
Savers
What are those with a need for money called?
Borrowers
What do savers tend to put into banks?
Deposits
What do borrowers tend to take out of banks?
Loans
Explain savers?
SAVERS have more money than they need
This means they have a surplus of money that they probably want to generate more money with
Give 2 examples of savers?
Individuals
Companies
Name a company that has lots of spare cash?
Apple
What is the role of banks?
BANKS and BUILDING SOCIETIES don’t just sit on the money deposited with them
They use it to generate more money
Explain banks lending customers deposited funds to borrowers?
1) Customers deposit their money into the bank
2) Bank pays interest to the depositors for their funds
3) Banks lend the deposited funds to borrowers at a HIGHER rate of interest than that paid to depositors
4) The bank generates a SURPLUS of money from the different in the interest charged and received
5) The surplus should be enough for the bank to pay its OPERATING COSTS and to generate PROFIT FOR SHAREHOLDERS
What is fractional reserve banking?
FRACTIONAL RESERVE BANKING is a system where banks are only required to hold a fraction of customer’s deposits as reserves, lending out the rest to borrowers
Is does higher reward increase proportionally with increasing risk?
Yes
What should fractional reserve banking help?
should help stimulate the economy
Give 3 examples of borrowers?
Individuals
Companies
Governments
Why may someone be a borrower?
because of a small start-up / business idea
What provides the link between savers and borrowers?
the financial markets
In what 3 ways is the link, provided by the financial markets, between savers and borrowers provided?
Banks
Equity
Bonds
How does equity specifically provide the link between savers and borrowers?
-an alternative to borrowing from banks is for the business to sell equity
-equity is alternatively referred to as shares or stock and it represents ownership
-the holders of the equity in a company own that company, so if a business is set up as a company, it can raise money by selling shares
-finance is raised by selling an equity stake in the business
-there is no interest paid on equity and equity does not need to be repaid
How do banks specifically provide the link between savers and borrowers?
-customers deposit their surplus money at a bank, for which the bank is willing to pay interest
-bank will then lend the deposited money on to borrowers charging a higher interest than they paid the depositing customer
-the bank generates surplus money which is NOT PROFIT as there are various costs such as : staff wages, office rental payments and taxes
How do bonds specifically provide the link between savers and borrowers?
-borrowers issue IOUs (IOU = ‘I owe you’), typically called bonds
-IOUs are issued directly to the investors, missing out the banks
-like a loan from a bank, borrowing money by issuing bonds is another form of debt on which the borrower will pay interest and which needs to be repaid
-borrower might agree to pay the holder of the bonds back in ten years, until that point agree to pay them a rate of interest each year
Is putting surplus money into an established bank’s deposits account less risky than investing it by lending it to a friend?
Yes
What do risk and reward run in?
RISK and REWARD run hand in hand
What is bank overdraft?
Bank overdraft, which is a form of loan on which the bank can demand repayment immediately
By contrast, a typical mortgage may not be totally repaid for 25 or 30 years
What are the 2 ways that the financial services industry can be viewed as linking those with surplus money (savers) and those with a need for money (borrowers)?
Equities (ownership stake)
Bonds (I owe you’s)
Can borrowers include companies and governments?
Yes
