CHAPTER 18 Understanding Money, Banking, and Credit 18.7 TEXTBOOK ANSWER KEYS 18.7a Return to Inside Business Umpqua Bank 1. Why would Umpqua go out of its way to make each branch a community hub? Given the intense competition within the banking industry, Umpqua can differentiate itself and demonstrate that it’s an integral part of the local area by making branches into community hubs. This also reminds non-customers who attend events at a branch that Umpqua cares about the community and stands ready to serve their banking needs. Students may suggest other reasons, as well. 2. Would you like to work for a commercial bank like Umpqua, which serves consumers, small businesses, and corporations? Explain your answer. While students will answer this question based on their own career goals and preferences, it should be pointed out that Umpqua Bank is a well-established and growing business, recognized as one of the country’s 100 best employers. For many students, stability, growth, a good working environment, and geographical scope are important considerations when answering this question. Students may also express their opinions of banks as employers, in light of the recent economic turmoil. 18.7b Review Questions 1. How does the use of money solve the problems associated with a barter system of exchange? In a barter system of exchange, the two parties must need each other’s products at the same time, and the products must be roughly equal in value. Value can be assessed differently by each person; what is valuable to one person may mean less to another. Money, on the other hand, can be either saved or used immediately. It has a predetermined value, and everyone needs it at some time or other. 2. What are three functions money must perform in a sound monetary system? a. Money serves as an accepted medium of exchange. (The seller accepts money in exchange for goods or services.) b. Money serves as a measure of value. (A mink coat has more value than a piece of penny bubble gum.) c. Money represents a store of value. (Money can be retained and accumulated in a savings account, a jar, a certificate of deposit, etc.) 3. Explain why money must have each of the following characteristics: (a) divisibility, (b) portability, (c) stability, (d) durability, and (e) difficulty of counterfeiting. a. Divisibility: Money must be able to accommodate small as well as large purchases. b. Portability: Money must be light enough and small enough to be carried easily. c. Stability: Money should retain its value over time; otherwise, people may lose faith in it. d. Durability: No one would appreciate or use money that disintegrated. e. Difficulty of counterfeiting: No one would feel comfortable accepting money that could be imitated. 4. What is included in the definition of the M1 supply of money? Of the M2 supply? In the M1 definition, currency, demand deposits, and traveler’s checks make up the supply of money. The M2 supply of money consists of M1 (currency and demand deposits), money-market securities, and small-denomination time deposits or CDs of less than $100,000. 5. What is the Federal Reserve System? How is it organized? The Federal Reserve System is the central bank of the United States and is responsible for regulating the U.S. banking industry. It is controlled by the seven members of its board of governors. Each governor is nominated by the president and confirmed by the Senate for a 14-year term. The president selects the chairman and vice chairman of the board from among the board members for four-year terms. The Fed includes 12 Federal Reserve district banks and 24 branch territory banks. 6. Describe the actions the Federal Reserve took to maintain a healthy economy during the recent economic crisis. In your opinion, were the actions necessary? Were the Fed’s actions effective? The Federal Reserve took the following steps: a. Provided liquity by allowing banks in need of cash to borrow money from the Federal Reserve System. b. Supported troubled financial markets by providing secured loans to the financial institutions that sell commercial paper. c. Supported important financial institutions by providing non-recourse loans to large banks. d. Conducted stress tests of major banks to determine how well these banks could weather the economic crisis. It appears the Fed’s actions were necessary to prevent an economic meltdown and eventually a depression. There is a difference of opinon among financial experts as to the effectiveness of the Fed’s actions. History will judge its actions. At least for now, an economic crisis has been avoided and the country is moving slowly toward economic stability. 7. Explain how the Federal Reserve System uses each of the following to control the money supply: (a) reserve requirements, (b) the discount rate, (c) open-market operations. a. Reserve requirements are the percentage of its deposits that a bank must retain. They can be increased to slow the economy and stop inflation, or they can be decreased to stimulate a slow economy. b. The discount rate is the interest rate charged by the Fed for loans to member banks. When the Fed lowers the rate, member banks feel free to make more loans and to charge lower interest rates, which generally stimulates the economy. When the Fed increases the rate, banks begin to restrict loans and increase interest rates effecting a slowing of the economy, which checks inflation. c. Open-market operations are the buying and selling of U.S. government securities by the Fed. To decrease the money supply, the Fed sells government securities on the open market. To increase the money supply, it buys government securities. 8. The Federal Reserve and the Consumer Financial Protection Bureau are responsible for enforcing the Truth-in-Lending Act. How does this act affect you? The Truth-in-Lending Act, which was passed by Congress in 1968, requires lenders to clearly state the annual percentage rate and total finance charge for a consumer loan. 9. What is the difference between a national bank and a state bank? What other financial institutions compete with national and state banks? A national bank is a commercial bank chartered by the U.S. Comptroller of the Currency. A state bank is a commercial bank chartered by the banking authorities in the state in which it operates. Other financial institutions that compete with national and state banks include savings and loan associations, credit unions, mutual savings banks, insurance companies, pension funds, brokerage firms, finance companies, and investment banking firms. 10. Describe the major banking services provided by financial institutions today. Banking services include checking accounts, savings accounts, online banking, NOW accounts, and certificates of deposit. Lending services include short- and long-term loans. Banks also provide credit card and debit card services, electronic transfer of funds, and international banking services. 11. For consumers, what are the major advantages of online banking? Online banking is accessible, is fast, and eliminates some costly processing of checks. Its major advantages for the consumer include the following: the convenience of electronic deposits; the ability to obtain current account balances; the convenience of transferring funds from one account to another; the ability to pay bills; the convenience of seeing which checks have cleared; easy access to current interest rates; and simplified loan application procedures. The most important advantage of online banking for the financial institution is the lower cost of processing large numbers of transactions. 12. How do automated teller machines, automated clearinghouses, point-of-sale terminals, and electronic check conversion affect how you bank? a. An automated teller machine (ATM) is an electronic bank teller that provides almost any service a human teller can provide. ATMs are located in bank parking lots, supermarkets, drugstores, and gas stations and thus provide convenience and are accessible at all times of the day or night. b. An automated clearinghouse (ACH) processes checks, recurring bill payments, Social Security benefits, and employee salaries. The ACH system saves time and effort for both employers and employees and adds a measure of security to the transfer of these payments. c. A point-of-sale (POS) terminal is a computerized cash register that is located in a retail store and connected to a bank’s computer. When a purchase is made, it immediately deducts the amount of the purchase from the customer’s account and adds it to the store’s account. It ensures that the store gets its money and that both the customer and store’s bank balances are up to date. d. Electronic check conversion (ECC) is a process used to convert information from a paper check into an electronic payment for merchandise, services, or bills. 13. How can a bank or other financial institution help American businesses to compete in the global marketplace? For international businesses, banking services are extremely important. Depending on the needs of an international firm, a bank can help by providing a letter of credit or a banker’s acceptance. A letter of credit is a legal document issued by a bank or other financial institution guaranteeing to pay a seller a stated amount for a specified period of time. (With a letter of credit, certain conditions like delivery of the merchandise may be specified before payment is made.) A banker’s acceptance is a written order for the bank to pay a third party a stated amount of money on a specific date. (With a banker’s acceptance, no conditions are specified. It is simply an order to pay without any strings attached.) Both a letter of credit and a banker’s acceptance are popular methods of paying for import and export transactions. Also, financial institutions provide for currency exchange. 14. What is the basic function of the FDIC and NCUA? How do they perform this function? The FDIC’s main purpose is to insure deposits against bank failure. In a similar fashion, the NCUA insures deposits in credit unions. All accounts are insured for up to $250,000 per category of ownership per institution. 15. How would you check the information provided by an applicant for credit at a department store? By a business at a heavy-equipment manufacturer’s sales office? At a department store, you could use a credit bureau. At a heavy-equipment manufacturer’s sales office, you could use the industry association, one of the global credit-reporting agencies, such as Dun & Bradstreet, or a local credit-reporting agency. 18.7c Discussion Questions 1. Based on what you know at the time you are answering this question, how would you describe the financial health of the U.S. economy? Of the global economy? At this writing, the financial health of the U.S. economy has to be described as poor. While the United States has weathered an economic crisis, unemployment is at record levels, housing foreclosures are at an all-time high, over a hundred banks are still on the verge of insolvency, and it continues to be extremely difficult for individuals and businesses to get credit from banks. The global economy is also in dire straits. Greece and Ireland are bankrupt, and several countries in Europe and other parts of the world are close to insolvency. 2. It is said that financial institutions use a process called deposit expansion to “create” money when they make loans to firms and individuals. Explain what this means. By making loans to firms and individuals, the institutions can use deposit expansion to put money into the economy, thereby increasing both the money supply and the amount of money in circulation. The institutions receive more money than they lend by charging interest, which enables them to continue to make loans. 3. Why does the Fed use indirect means of controlling the money supply instead of simply printing more money or removing money from circulation when necessary? Printing more money is not possible when there is nothing to back it up; the money is worth nothing in that case. Removing money from circulation is virtually impossible. To do it fairly, the Fed would have to take money from each person. 4. Why would banks pay higher interest on money left on deposit for longer periods of time (e.g., on CDs)? Banks pay higher interest on CDs because they want people to make a commitment to leave their money on deposit. The banks are then able to use this money for loans for longer periods of time. 5. How could an individual get in financial trouble by using a credit card? If you were in trouble because of credit card debt, what steps could you take to reduce your debts? People get in trouble by using a credit card to purchase more than they can afford. According to financial planners, credit card transactions should be limited to paying for “emergencies.” If you cannot pay off credit card debt each month, you may be headed for financial trouble. Steps that can be taken to reduce your debts include: stop shopping, contact your creditors, discuss options for reducing your finance charges, and repay your debts with lower monthly payments. If you need assistance, several organizations can help: the Consumer Credit Counseling Services (www.cccsintl.org), Myvesta (www.myvesta.org), or Debtors Anonymous, to mention a few. 6. Assume that you want to borrow $10,000. What can you do to convince the loan officer that you are a good credit risk? For individuals, the following suggestions may be helpful when applying for a loan: • Although it may pay to shop around for lower interest rates, you usually have a better chance of obtaining a loan where you have an account. • Obtain a loan application and complete it at home. • Be prepared to describe how you will use the money and how the loan will be repaid. • Be prepared for the interview with the loan officer. • If your loan request is rejected, try to analyze what went wrong. Business owners in need of financing may find these additional tips helpful: • It is usually best to develop a banking relationship before you need financing. • Apply for a preapproved line of credit or revolving credit agreement even if you don’t need the money. • In addition to the application, supply CPA-prepared financial statements and business tax returns for the last three years and your own personal financial statements and tax returns for the same period. • Write a cover letter describing how much experience you have. 18.7d Comments on Video Case 18.1 Suggestions for using this video case are provided in the Pride/Hughes/Kapoor Video Guide. Chase Bank Helps Small Business Owners 1. If you were a small-business owner, would you take advantage of any of Chase’s or another bank’s small-business banking services? Why or why not? Most business owners will need to use at least some of the services Chase and other banks offer, from the most basic checking, savings, and credit and debit card services to lines of credit, commercial mortgages, and international funds transfer and currency exchange. While some students may see taking on debt as a negative, for business owners borrowing capital is a means to improve and expand the business as well as to help the firm over rough spots when cash flow is interrupted or an unforeseen opportunity arises that requires the investment of extra funds. Thus, for creditworthy firms, business borrowing is a means to growth. 2. Can you think of any additional financial or banking services that banks could offer small-business owners? Students might have some interesting ideas about the use of new technology such as mobile phone apps, conferencing via videocam, industry-specific text alerts, webinars on the business environment or the economy, and so on. They might also envision advisory services such as tax planning and providing help in filling financial or accounting positions in the firm or locating properties and facilities to lease or buy. 3. Chase prides itself on its ability to know many of its business customers personally and to keep up-to-date on the industries in which they operate. Why would this familiarity be an advantage for the bank? Knowing the industries in which its business clients operate helps Chase understand when and why business might be on a temporary up- or downswing; as well as what normal profit margins for its clients are; what kind of seasonal influences might affect their business volume (and thus their cash flows and borrowing needs); and whether it makes sense for them to expand, merge, or take other financial risks given the state of the industry. A bank that has the opportunity to know its clients personally can establish helpful business relationships with them that not only allow the bank to offer additional services the business owner might not have taken advantage of, but also give it insight into how well the firm is being run and, among other things, whether it represents an acceptable risk as a loan or credit customer. 18.7e Comments on Case 18.2 Bank of Hawaii Says “Aloha” to Customers and Communities 1. Do you agree with Bank of Hawaii’s decision to open branches in stores while it continues to invest in new technology for electronic and mobile banking? Explain your answer. Students who agree with the in-store branch decision may say that it gives customers more choices about when and where to bank, while they shop, at a different branch, or via electronic and mobile banking. They may also observe that shoppers who aren’t customers may decide that the convenience of banking at that store is a good reason to open an account with Bank of Hawaii. Students who disagree may say that electronic and mobile banking represent lower-cost ways of serving customers’ needs. If fewer customers need to visit branches to complete transactions or receive information, opening new branches in stores is a costly undertaking. Ask students whether they bank electronically and how often they visit a branch. What are the implications for Bank of Hawaii’s future decisions? 2. How might Bank of Hawaii adjust its credit policies if the area experiences a sudden or dramatic economic downturn? Suggest at least two adjustments the bank should make when applying the five C’s of credit in such a situation. The five C’s are character, capacity (to pay), capital, collateral, and conditions. Bank of Hawaii might be more inclined to lend to current customers because it has experience with their character (promptness in paying in the past), an important consideration. At the same time, the bank might tighten its lending policies to take a closer look at a borrower’s capacity—especially job status and employment income—and require more capital (higher net worth) to better predict who will repay a loan. Students will recognize that collateral and conditions are also essential, and suggest specific changes that the bank could make in the event of a downturn. 3. In addition to the many languages spoken throughout the islands, what other challenges do you think banks face in serving the financial needs of individuals and businesses in Hawaii? What are the implications for Bank of Hawaii? This question should spark good discussion and a variety of responses. For example, the distance between islands might be a challenge in determining where to open a branch in order to serve island-hopping customers both efficiently and effectively. A second example might be the challenge of lending to businesses that rely on seasonal sales or tourism. Bank of Hawaii has expertise and experience in expanding despite such challenges, adding to its competitive strength and its ability to defend its market position against banks that seek to expand into Hawaii. 18.7f Building Skills for Career Success 1. Social Media Exercise 1. For the consumer, what are the advantages and disadvantages of Google Wallet (and similar services)? The biggest advantages of Google Wallet are convenience and security. It’s easy to use, is free, and eliminates the need for some people to carry around a wallet. You swipe your phone instead of using a credit card. Consumers can tap to pay using Google Wallet at hundreds of thousands of MasterCard PayPass merchant locations. Again, this translates into convenience. The microchip in the phone will store coupons, credit card information, discount cards, and loyalty cards. Because the service requires a PIN, your money won’t be withdrawn or spent even if your phone is stolen. (However, if you lose your phone, you’ll need to cancel the credit cards you’ve stored on Google Wallet.) Google Wallet is not without its disadvantages. Having a “virtual money source” may encourage people to spend more than they have. It’s not usable at all stores, and it doesn’t work with all credit cards. While you do have a PIN, if you lose or misplace your phone, you need to cancel your credit cards. Finally, with all of this information stored in the phone, you are placing a lot of trust in Google, and hackers abound. 2. For merchants, what are the advantages and disadvantages of Google Wallet (and similar services)? Advantages: Merchants can take advantage of mobile wallet capabilities to extend personalized marketing offers and promotions directly to customers. They can also issue loyalty cards that synchronize with Google Wallet, so real-time rewards balance information and redemption capabilities reside on the phone. Disadvantages: Merchants have to upgrade their points of sale so they can accept mobile payment. This can require a significant investment. Old card readers would need to be replaced because they do not have the capability they need to communicate with a commerce-enabled mobile phone. Smaller merchants may be reluctant to embrace new technology too quickly; there has to be a compelling reason for them to do so. 3. Would you use Google Wallet? Why or why not? I would consider using Google Wallet for its convenience and integration with Google services, but I'd weigh the privacy concerns. Google collects a lot of data, so using it might compromise some privacy, especially regarding transaction history. If privacy is a top priority, I might opt for alternatives with stronger privacy protections. 2. Journaling for Success 1. Use the Internet to obtain information about how to prevent identity theft. Then, according to the professionals, describe the steps someone should take to protect his or her identity. There are many sites that contain information on this topic. A good one is the FTC site, http://www.ftc.gov/bcp/edu/microsites/idtheft/, which goes into significant detail not only on the prevention of identity theft, but also on what to do if you are a victim. The key is monitoring not only credit reports but also all bills carefully. Another tip is to not give out Social Security numbers to businesses. 2. Complete a “security audit” of your personal information and financial records. Based on your audit and the recommendations from professionals, what should you do now to protect your identity? In addition to monitoring and not giving out Social Security numbers, students should be alert to paperwork from the school, banks, and other institutions which might contain sensitive information. They should be put away and/or shredded. 3. It always helps to have a plan in case your identity is stolen. Based on the information you obtained from your Internet research, what immediate steps should you take if your identity is stolen? Among other things, students should plan on making a police report, placing a fraud alert on all credit cards, closing accounts where appropriate, and so forth. More tips are provided on Web sites such as the one noted above. 3. Developing Critical-Thinking Skills Interest rates can vary significantly depending on the city that is researched and the time of year of the research. Upon completing the assignment, students will find that there can be a significant range in mortgage interest rates as well as CD rates and that by doing a modicum of research they can save considerable money. 4. Building Team Skills Bankruptcy can be either voluntary or involuntary. Under voluntary bankruptcy, the individual initiates the process and asks to be judged bankrupt because of an inability to pay off debts. Under involuntary bankruptcy, creditors initiate a request that an individual be judged bankrupted. There are two options for filing personal bankruptcy—Chapter 13 and Chapter 7. Chapter 13 allows a person to set up a three-year debt repayment plan. Chapter 7 is a liquidation plan that requires a trustee to sell all assets and divide the proceeds among creditors. Under Chapter 7, limited amounts of certain property values are exempt from creditors, such as home equity, motor vehicles, household furnishings, personal items, personal property, and tools of one’s trade. Bankruptcy procedures begin when a petition is filed with the court under either Chapter 13 or Chapter 7 of the Bankruptcy Code. The amount of the filing fees varies. Secured claims are paid first; then the costs of filing and processing the case are paid before unsecured claims are paid. Chapter 13 proceedings are less complicated and less expensive than Chapter 7 proceedings. The individual files a plan for paying off debts to the court. The debtor makes payments to a court-appointed trustee in monthly installments as agreed. The trustee pays the creditors. Reasons why personal bankruptcy may not be the way to handle debts: a. It does not wipe out most mortgages on property. The law protects properly executed security agreements on automobiles and homes, up to their value. b. It does not wipe out claims for alimony or child support. c. It does not wipe out most taxes. d. It does not wipe out government-insured student loans (becoming payable in the past seven years). e. It does not wipe out claims arising from fraudulent representations to obtain funds or willful injuries. f. It does not wipe out debts for large purchases made shortly before the bankruptcy filing. g. If you file a bankruptcy, it may stay on your credit report for up to 10 years! h. It may affect future borrowing power. Suggestions for managing too much debt: a. Communicate with your creditors and try to develop a payment plan that more adequately meets your current situation. b. Prepare a written budget to plan your future expenses within your means. c. If you need assistance, contact Consumer Credit Counseling Service (CCCS) or Myvesta in your area, which can assist at little or no cost to you. For the address of your local Consumer Credit Counseling Services (www.cccs.org), call 888-577-2227. For the address of local Myvesta services (www.myvesta.org), call 800-698-3782. How the Consumer Credit Counseling Service or Myvesta can help this couple: a. Both organizations help people who are having trouble making payments to credit cards, banks, and financial institutions. Many creditors will agree to stop or lower the interest, stop late charges and over-limit fees, and lower the payments. Usually, the collectors will stop calling. b. Both organizations can help avoid wage garnishment. How the CCCS and Myvesta do it: a. Both organizations try to consolidate all credit card payments and loans into one lower monthly payment, which is paid into an FDIC-insured bank trust account. b. Both organizations disburse the funds to the creditors. c. Only one payment is required each and every month to keep a good credit standing. According to the experts, no more than 20 percent of a family’s monthly gross pay should be used for short-term credit card debt. To use credit cards wisely and economically, they should be used only as a convenience and the balance paid off at the end of the month. Otherwise, the high interest payment erodes the principal, reducing the amount of money available for future purchases or savings. Credit cards should be used only as a temporary means to expand your credit and not as a long-term method. 5. Researching Different Careers The answers will vary depending on what each student finds in his or her credit report. 18.8 QUIZZES I AND II Quiz I True-False Questions Select the correct answer. 1. T F If a country has a good barter system, there is no need for metal coins or paper bills. 2. T F The Federal Reserve System was established in 1913 to provide home mortgages for qualified applicants. 3. T F One of the ways that the Fed can reduce the nation’s money supply is to sell government securities on the open market. 4. T F The U.S. Comptroller of the Currency must charter a state bank. 5. T F A NOW account is an interest-bearing checking account. Multiple-Choice Questions Circle the letter before the most accurate answer. 6. When money is used as a single standard or yardstick to assign values to and compare the value of products, services, or resources, it is a a. medium of exchange. b. measure of value. c. store of value. d. stability factor. e. durability factor. 7. To reduce the supply of money in the economy, which of the following actions would the Federal Reserve take? a. Increase the portability factor b. Buy government securities c. Lower the discount rate d. Increase the reserve requirement e. Appoint a new chairman 8. A(n) __________ is a financial institution that provides financial services to members who often must purchase at least one share of ownership. a. commercial bank b. savings and loan association c. credit union d. brokerage firm e. investment banking firm 9. A(n) __________ is a computerized cash register located in a retail store and connected to a bank’s computer. a. MTA terminal b. ACH terminal c. POS terminal d. money machine e. COD terminal 10. The borrower’s financial ability to meet current obligations is referred to as a. character. b. collateral. c. conditions. d. capital. e. capacity. Quiz II True-False Questions Select the correct answer. 1. T F Inflation is a general rise in the level of prices. 2. T F The most frequently used tool to control the supply of money is regulation of the discount rate. 3. T F A national bank is a commercial bank chartered by the U.S. Comptroller of the Currency. 4. T F A line of credit is a loan that is approved before the money is actually needed. 5. T F The term conditions refers to the borrower’s financial ability to meet credit obligations. Multiple-Choice Questions Circle the letter before the most accurate answer. 6. An amount on deposit in a checking account is a(n) a. time deposit. b. example of deposit expansion. c. demand deposit. d. reserve demand. e. open-market operation. 7. Real estate or property such as stocks, bonds, equipment, etc., pledged as security for a loan is known as a. revolving credit. b. a demand deposit. c. capacity. d. collateral. e. a letter of credit. 8. A(n) __________ is a legal document issued by a bank or other financial institution guaranteeing to pay a seller a stated amount for a specified period of time that specifies certain conditions that must be met. a. letter of credit b. banker’s acceptance c. reserve statement d. open-market agreement e. Fed letter 9. Today, the FDIC provides deposit insurance of __________ per account. a. $10,000 b. $25,000 c. $50,000 d. $250,000 e. $500,000 10. The borrower’s attitude toward credit obligations is referred to as a. conditions. b. capital. c. character. d. capacity. e. collateral. 18.9 ANSWER KEY FOR QUIZZES I AND II Quiz I True-False Multiple-Choice 1. F 6. b 2. F 7. d 3. T 8. c 4. F 9. c 5. T 10. e Quiz II True-False Multiple-Choice 1. T 6. c 2. F 7. d 3. T 8. a 4. T 9. d 5. F 10. c 18.10 CLASSROOM EXERCISES 18.10a Homework Activities • Have students bring in an article that discusses interest rates or the debt issues involved with the aging of the baby-boomer generation and entitlement programs. • Researching and Following a Company Throughout the Course (continuing assignment). Based on the financial information researched for Chapter 17, describe the company’s long-term debt (if any). • If most of your students are using credit cards, ask them to compile important information regarding their credit cards for their personal file. In the file, they could collect the most recent information they have received regarding notification of lost/stolen credit cards, APRs, credit limits, minimum payment percentages, balance calculation methods, grace periods, billing cycles, late payment fees, over-the-limit fees, and transaction fees. • Have students research local banks that offer MasterCard or Visa accounts and compare the terms (APR, annual fee, collateral deposit in bank, interest earned, balance calculation methods, grace period, application/processing, etc.). • The Fed Chairman Game. Have students go to the Web site for the Federal Reserve Bank of San Francisco (http://www.frbsf.org/) and click on the Education tab, then on Student Activities, and finally on the link for Play the Fed Chairman Game. This is an interactive online game in which students take charge of a simulated economy and take actions to keep inflation low and stable and keep the unemployment rate low by manipulating the federal funds rate. After they have played the game, have them write a brief (one- to two-page) summary of their experience. How did the economy fare under their leadership? What did they learn from playing the game? (Alternatively, you can use this in the classroom as a team competition. See instructions below under Classroom Activities.) • Credit Card Simulator Game. This interactive online simulator allows students to choose a credit card (giving them the plusses and minuses of each selection), go shopping, make payments, and see how long it will take them to pay off the debt depending on the amount of their payment. The Web site for this game is http://www.channelone.com/life/swf_credit/. After students have played the game, have them write a brief (one- to two-page) summary of their experience. What did they learn from playing this game? 18.10b Classroom Activities • Debate Classroom Exercise. Have students debate the pros and cons of the proliferation of ATMs and POS terminals both for themselves and financial institutions. • Money, Money, Money! Exercise. This is a fun exercise that takes about 20 minutes. Students are divided into groups and asked to come up with a medium of exchange to be used as money when they are hypothetically stranded on a deserted island. The directions and criteria are all provided on the handout, which should be given to each student. They will have fun deciding what does and does not meet the criteria. In the handout, no mention is made of the airplane itself. Some of the students will suggest that any rescued parts of the plane (e.g., metal from wings, etc.) be broken up into currency. • Trees, Trees, Everywhere! Exercise. Place students in groups of four to seven and pass out the handout to each student. Students should develop one list of basic documentation that needs to be accumulated and organized for the typical business loan application process. This activity will take 20 to 25 minutes. • What’s New in Banking and Finance? Exercise. Divide students into groups of four to seven and pass out the accompanying handout. Emphasize to students that they do not need to know every detail about new processes or practices, just a general idea. For example, if they’ve seen something new in a commercial, use it as an example and explore the advantages and disadvantages to the extent that you understand the new innovation. It isn’t important to fully understand the new innovation, but instead to have a general idea and contemplate the implications of the innovation. • Who’s Got the Interest? Exercise. This is a fast exercise that demonstrates the importance of keeping interest payments low or even nonexistent. Place students into groups of four to five, and pass out a copy of the handout to each group. One group member is to be the scribe. Give the groups five minutes or even less to list, on one side of the page, all the types of transactions they make where they earn interest. On the other side, they should list all the transactions they make where they are charged interest. At the end of the allotted time, ask the teams to share the results. It will quickly become apparent that the interest payments far exceed their opportunity to earn interest. The implication is that they should try to keep their interest expense as low as possible because otherwise they are depleting their assets. • The Fed Chairman Game Team Competition. Break students up into small groups (three to four students) and have them go to the Web site for the Federal Reserve Bank of San Francisco (http://www.frbsf.org/) and click on the Education tab, then on Student Activities, and finally on the link for Play the Fed Chairman Game. This is an interactive online game in which students take charge of a simulated economy and take actions to keep inflation low and stable and keep the unemployment rate low by manipulating the federal funds rate. After they have played the game, have them report orally on how the economy fared under their leadership and what they learned from playing the game. You might also consider awarding a small prize (or bonus points) for the team that achieves the best results. (Note: You can also use this exercise as a homework assignment for individual students. See Homework Activities above.) 18.10c Exercise Handouts Follow on Next Pages Money, Money, Money! The bad news is that you were on a jumbo jet that crashed. The good news is that every one of the 340 passengers and crew survived and made it to a deserted island with food and water. After six months, it has become clear that some changes need to be made, at least in the area of “money.” For the last six months, the survivors have bartered fish for labor, wild pig, and wood, etc., and this system is not working very well. A new medium of exchange is needed. Your task in your groups is to develop ideas as to what can be found in your new environment that can be used for money. The important characteristics of money are that it must be easy to use, be trusted, and be capable of performing three functions: (1) be a medium of exchange, (2) be a measure of value, and (3) be able to be stored. To meet these requirements, money must possess the following five characteristics: a) Divisibility. The standard unit of money must be divisible into smaller units to accommodate small purchases as well as large ones. b) Portability. Money must be small enough and light enough to be carried easily. c) Stability. Money should retain its value over time. When it doesn’t, people tend to lose faith in their money. d) Durability. The objects that serve as money should be strong enough to last through reasonable usage. e) Difficulty of counterfeiting. If a nation’s currency were easy to counterfeit, its citizens would be uneasy about accepting it as payment. As you and your team begin to contemplate what your new money should be, some considerations should be kept in mind: 1. There are no precious metals on the island. 2. There are no oysters (pearls). 3. There are wild pigs, trees, various rocks and pebbles on the beach, shells, flowers, coconuts, and tropical fruits. 4. Whatever you select, you must ensure that the supply can be controlled so that individuals cannot make their own money whenever they choose. Good Luck! Trees, Trees, Everywhere! TJ Reforestation plans to become the premier tree trimmer, forest maintenance, and tree care company in the surrounding Salem, Oregon, area. With 12 years of experience, TJ Reforestation is ready to take the next step to expand its business to meet the growing needs of the urban and rural community. TJ Reforestation currently focuses on two specific business areas: (1) tree trimming primarily for apartment, commercial, and residential owners; and (2) tree planting and replanting in surrounding forest areas in the northwest. The company knows the importance of the Christmas tree market in the northwest and is ready to take the next step and launch into tree farm planting, maintenance, and vegetation management. A simple drive through the surrounding rural roads quickly shows the lack of maintenance and management of the multitude of Christmas tree farms. The plan will be to launch a full advertising and publicity campaign offering maintenance and management services to these neglected farms. Yet, as with almost all expansion, one fundamental element is missing—sufficient capital. The owners of TJ Reforestation, Angela Boyles and Michael Correr, have estimated that they will need a loan of approximately $400,000. They have decided to divide the work. Angela is researching loan options—which lenders to consider, approximate interest rates, and the difference between loans offered through the Small Business Administration (SBA), state and local economic development agencies, commercial banks, and nonprofit organizations. Michael’s task is to accumulate all necessary documentation. Your team should list the documentation and any details, description, or questions that may further prepare TJ Reforestation for the loan process. Documentation 1: ____________________________________ Details: ______________________________________________________________ Documentation 2: ____________________________________ Details: ______________________________________________________________ Documentation 3: ____________________________________ Details: ______________________________________________________________ Documentation 4: ____________________________________ Details: ______________________________________________________________ Documentation 5: ____________________________________ Details: ______________________________________________________________ Documentation 6: ____________________________________ Details: ______________________________________________________________ Documentation 7: ____________________________________ Details: ______________________________________________________________ Documentation 8: ____________________________________ Details: ______________________________________________________________ Documentation 9: ____________________________________ Details: ______________________________________________________________ Documentation 10: ___________________________________ Details: ______________________________________________________________ Documentation 11: ___________________________________ Details: ______________________________________________________________ Documentation 12: ___________________________________ Details: ______________________________________________________________ Trees, Trees, Everywhere! Instructor Notes According to the Small Business Administration (http://www.business.gov/financing/loans/ loan-checklist.html), basic documentation for loan application includes: 1. Loan application form a. Why are you applying for this loan? b. How will the loan proceeds be used? c. What assets need to be purchased, and who are your suppliers? d. What other business debt do you have, and who are your creditors? e. Who are the members of your management team? 2. Personal background a. Previous addresses, names used, criminal record, educational background, etc. 3. Résumés 4. Business plan a. Should include complete set of projected financial statements, profit and loss, cash flow, and balance sheet 5. Personal credit report 6. Business credit report 7. Income tax returns a. Often, the previous three years are required. 8. Financial statements a. Many loan programs require owners with more than a 20 percent stake in the business to submit signed personal financial statements. 9. Bank statements 10. Accounts receivable and accounts payable 11. Collateral 12. Legal documents a. Business licenses and registration b. Articles of incorporation c. Copies of contracts with any third parties d. Franchise agreements e. Commercial leases What’s New in Banking and Finance? Banking and finance do not remain stagnant. Customers expect new features, new processes, and convenient access to their money and potential loans. What is new, interesting, or on the near horizon of the banking and finance world? Consider the potential advantages and disadvantages of each of these new changes. Banking or Finance Innovation Advantages (from customer OR bank perspective) Disadvantages (from customer OR bank perspective) WHO’S GOT THE INTEREST? In your teams, list as many transactions as you can in the left-hand column on which you can earn interest. On the right-hand side, list all the types of transactions that result in interest being charged. Work quickly, as you only have a few minutes. All Transactions Interest Earned Interest Charged Chapter 18 Video Case: Chase Bank Helps Small Business Owners RUNNING TIME: 6:40 Chapter 18 introduces the concepts of money, banking, and credit. Money is anything a society uses to purchase products, services, or resources. The Federal Reserve System is responsible for regulating the U.S. banking industry and maintaining a sound economic environment. Most everyone has been affected in one way or another by the nation’s economic problems. Now that the nation’s economy shows signs of improvement, there is a movement to reform the banking and financial industry and increase government regulation. Banks and other financial institutions offer today’s customers a tempting array of services. Competition among banks, brokerage firms, insurance companies, and other financial institutions has increased. The Federal Deposit Insurance Corporation (FDIC) and the National Credit Union Association (NCUA) insure accounts in member financial institutions for up to $250,000. Credit is immediate purchasing power that is exchanged for a promise to repay borrowed money, with or without interest, at a later date. Concepts Illustrated in the Video • Account Services • Capital • Leveraging Branch Distribution • Client Relationships • Electronic Payment Collection • Finance • Line of Credit • Managing Funds • Small Business Management • Term Loans VIDEO CASE SUMMARY JPMorgan Chase & Co. is a global financial holding company formed in 2000 by a merger of Chase and J.P. Morgan and has recently become the second-largest branch network in the United States. Today, the company operates in more than 60 countries and employs more than 200,000 people worldwide. Chase holds assets estimated to be worth about $2 trillion and is included in the Dow Jones Industrial Average (DJIA). Despite an economic downturn, the bank recently posted better than anticipated profits for two quarters in a row. Chase financial services are conducted via branch offices, ATMs, telephone, and online. The company issues consumer credit cards; serves small businesses with financing, banking services, and payment collection; offers home mortgages and home equity loans; makes auto and educational loans; and helps customers with personal retirement and investment planning. Chase makes it possible for small businesses to conduct transactions globally, whether that means buying goods abroad or accepting orders from international customers. Critical-Thinking Questions Using information from the case and the video, answer the following questions: 1. If you were a small-business owner, would you take advantage of any of Chase’s or another bank’s small-business banking services? Why or why not? Most business owners will need to use at least some of the services Chase and other banks offer, from the most basic checking, savings, and credit and debit card services to lines of credit, commercial mortgages, and international funds transfer and currency exchange. While some students may see taking on debt as a negative, for business owners borrowing capital is a means to improve and expand the business as well as to help the firm over rough spots when cash flow is interrupted or an unforeseen opportunity arises that requires the investment of extra funds. Thus, for creditworthy firms, business borrowing is a means of growth. 2. Can you think of any additional financial or banking services that banks could offer small-business owners? Students might have some interesting ideas about the use of new technology such as mobile phone apps, conferencing via videocam, industry-specific text alerts, webinars on the business environment or the economy, and so on. With the recent economic downturn in mind, students may find that providing basic financial education to customers through technological or traditional means may be a useful service to add. 3. Chase prides itself on its ability to know many of its business customers personally and to keep up-to-date on the industries in which they operate. Why would this familiarity be an advantage for the bank? Knowing the industries in which its business clients operate helps Chase understand when and why business might be on a temporary up- or downswing; what normal profit margins for its clients are; what kind of seasonal influences might affect their business volume (and thus their cash flows and borrowing needs); and whether it makes sense for them to expand, merge, or take other financial risks given the state of the industry. A bank that has the opportunity to know its clients personally can establish helpful business relationships with them that not only allow the bank to offer additional services the business owner might not have taken advantage of, but also give it insight into how well the firm is being run and, among other things, whether it represents an acceptable risk as a loan or credit customer. Chapter 18 Lecture Launcher: We Paid $300 … for Nothing! VIDEO SUMMARY Jake is ready to “Occupy Wall Street,” so to speak. He has has had it with Urban Farmz’s bank after being stuck on the phone on hold again waiting for customer service. “I’m so fed up with this bank,” he rants to Caleb. “Just this month alone, we’ve paid—get this—$300 in fees for nothing. We’ve given them all of our business. We pay our bills on time. No overdrafts. I don’t get it.” “So, break up with them,” Caleb replies nonchalantly. “There’s absolutely no way Urban Farmz can do that,” Jake says. “Switching our online banking, direct deposit, and electronic funds transfers to another bank would be a nightmare.” Caleb thinks they should try a credit union he knows of that works with entrepreneurial firms, many of which are well known. Will Jake listen to his advice? Or will he continue to put up with their current bank’s high fees and poor service? Solution Manual for Business William M. Pride, Robert J. Hughes, Jack R. Kapoor 9781133595854, 9780538478083, 9781285095158, 9781285555485, 9781133936671, 9781305037083
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