role of the financial system - manage flow of money within economy linking savers and borrowers, helps economy grow (savers earn money on deposits), financial institutions give out loans

evolution of banks - goldsmiths were paid fees by depositors, then lend deposits as loans to earn interest

4 historical pillars of the financial system - banks, trust companies, insurance companies, brokerage firms/ investment dealers

banks - institution that deals in money and its substitues and provides financial services

trust companies - businesses that manage people's money and property for them

insurance companies - provide financial protection to life and physical property

brokerage firms/ investment dealers - brought lenders and borrowers together through equity transactions

bank of canada - owned by govt- responsible for issuing currency. regulating money supply and controlling interest rates and oversees commercial banking system

types of financial institutions - bank- institution that deals in money and its substitutes and provides financial services, credit union- similar to bank but owned and operated by members and usually has fees associated with joining

types of banking financial institutions - currency exchange, line of credit, mortgage, insurance, bank account, credit card, personal/business loan. investment/registered products

CDIC - Canada Deposit Insurance Corporation- covers savings and chequing accounts, not covering mutual funds, stocks, investment

debt - when you owe someone money

debtor - A person who owes money

credit - sum of money made available for borrower

creditor - the lender

good debt - education or appreciating value

bad debt - rapidly depreciating assets purchased through loans types of

debt/credit - credit cards, consumer loans, line of credit, mortgage, business loan, installment buying

principal - amount borrowed

interest - cost of using someone elses money

APR - Annual Percentage Rate- total cost to use credit in a year

term - how long you have to repay a loan

fees - charges to use credit

prime rate - best interest rate offered, starting point for negotiations (currently 6.7%)

sources of credit - family and friends, financial institutions, mortgage and loan companies, retailers, yourself

instalment credit - borrow a set amount, fixed payments and time period, fixed or variable interest, ex car loan or mortgage

revolving credit - can borrow any amount up to a credit limit, req. min monthly payment, no fixed repayment period, ex credit card

variable interest rate - reflects interest rate changes in the economy as time progresses and loan is repaid

fixed interest rate - interest rate set for length of term

what affects interest rates - length of term, payment history, secured vs unsecured, source of credit, downpayment

secured debt - debt guaranteed by collateral

unsecured debt - a loan that is not backed by pledged assets (collateral)

considerations before securing loan - capital (collateral), character questions, capacity (ability to carry debt), credit rating

credit score - lower the score the worse the credit

credit report - A detailed report of an individual's credit history

frequent vs infrequent compound periods - frequent compounding periods allows investment to grow faster

traditional bank - customers can bank in person or remotely, offers a variety of financial services

virtual bank - all banking transactions take place remotely

chequing account - used for daily spending - typically comes with debit card and chequebook savings account - used to achieve short or long term saving goals by setting money aside and earning interest