MCS 2100 Lecture Notes - Lecture 3: Canada Deposit Insurance Corporation, Money Market Fund, Credit Union

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Unit 03
Types of Financial Institutions
- In Canada, financial institutions are federally regulation
- Rare in Canada to hear of failure of a financial institution
oMore likely to hear merger of financial instutions
oMeans most large financial corporations have divisions that cover most or all types of
business that financial institutions engage in
Deposit taking, lending, insurance and investing
Deposit-Type Institutions
- Are banks, trust companies and credit unions
- Are in business of taking money on deposit and are primary source of funds for consumer loans
- Banks divided into different classes
oSchedule I are Canadian owned
oSchedule II and III are foreign owned
More restrictions placed
- Trust companies function similar to a bank and are also allowed to act as a trustee
oCan manage the assets of corporations and individuals.
oMost trust companies owned by banks
- Credit Unions are an alternative to banks and type of cooperative
oMembers own it and have a say in running of it
oAny profits are returned to members
- Often loans are cheaper through credit unions
Non-Deposit Institutions
- Include life insurance companies, investment companies, mortgage and loan companies,
finance, and leasing companies, pawnshops and cheque-cashing outlets
- Some life insurance and investment companies have merged with big banks
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- Want to avoid finance and leasing companies, pawnshops and cheque-cashing outlets
oLast resort for people seeking loans and therefore charge high rates of interests
- Purchasing things through rent-to-own centre is also very expensive
Savings and Chequing Plans
- Term deposits and guaranteed investment certificates (GICs) are similar
oDifference- time of maturity
oTerm deposits mature less than a year and GIC mature in 1-5 yrs
oUsually theres minimum deposit and principal is locked in for duration
- Cashable GIC available but interest rate will be less
- If need to access the principal of a locked-in GIC before maturity, may have to pay a penalty
- If GIC sold to second party, may get less than principal if interest rates have increased
- Available from banks, investment dealers and stockbrokers
- Investment dealers and stockbrokers sell GICs and term deposits from many different financial
institutions and can often get better rates than banks
- Money market fund sold by investment companies and banks
oMoney invested is used to purchase variety of short-term financial instruments that
earn interest
oUnit 7
oCashable and very safe but have low interest rates
- Important factor in comparing savings plans is rate of return or yield
oIf interest is compounded, yield will be greater than stated interest rate
oEffective annual rate (EAR) used to compared yield
Incorporates compounding effect
oInflation will affect real rate of return of an investment
oCalculate real rate of return, subtract inflation rate from EAR
- Income taxes will reduce interest earned
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- High liquid savings usually have lower interest rates
oLikely need some savings that are highly liquid- emergency funds and purchases
oIf offered a low risk investment that pay high interest, likely not true and fraudulent
- Savings at bank are generally covered by deposit insurance through Canada Deposit Insurance
Corporation (CDIC)
oIndividual covered up to maximum of $100,000 per person per institution
oCovers savings, chequing account, GICs and term deposits
oDoesn’t cover money market funds and mutual funds
oCredit union have similar scheme
- Usually chequing accounts paid very little or no interest
- Important to compare chequing accounts- service fees
oSometimes waived if keep minimum amount on deposit
oIf sign up for overdraft protection, make sure understand how charges work
Unit 04
Types of Consumer Credit
Consumer Loans
- Include mortgages, car loans, consumer installment loans (bank or retail) and demand loans
- Borrow specific amount of money and repay it within set period of time with equal periodic
payment
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