This study guide covers every topic, concept, and key term from Unit 2 of BBYM's Financial Literacy Curriculum. Unit 2 builds directly on Unit 1's philosophical foundation — asking not just why financial management matters, but how the machinery of the financial system actually works: the markets, institutions, and intermediaries that move money through the economy. By the end of Unit 2, you will understand how money flows from savers to borrowers, who the key players are, how the Federal Reserve influences every loan you will ever take, and — critically — how to identify the institutions that build community wealth versus those that extract it.
Part 1 — Core Topics Explained
Detailed explanations of every major concept tested on the Unit 2 assessment
📋 Learning Objectives
- Distinguish between capital markets and money markets, and explain the role each plays in the economy
- Explain the difference between primary markets (new securities issued) and secondary markets (existing securities traded)
- Describe how the Federal Reserve influences interest rates and economic activity through monetary policy tools
- Identify and compare major financial intermediaries — commercial banks, credit unions, investment banks, CDFIs — and explain how each serves different community needs
- Define liquidity, securitization, and derivatives, and explain their role in the financial system
- Recognize the warning signs of predatory lending and identify mission-aligned alternatives for underserved communities like Birmingham-Bessemer
- Connect Unit 2 concepts to your own financial decisions: choosing a bank, understanding loans, and evaluating community financial institutions
1. What Are Financial Markets?
A financial market is any system or mechanism that allows buyers and sellers to trade financial instruments — stocks, bonds, currencies, loans, or derivatives. Financial markets perform four essential functions:
| Function | What It Does | Why It Matters to You |
|---|---|---|
| Allocate Capital | Money flows from those who have it (savers) to those who need it (borrowers and businesses) | Enables BBYM entrepreneurs to access loans and investment |
| Set Prices | Market prices reflect the collective judgment of thousands of participants about the value of assets | Helps you evaluate whether an investment is fairly priced |
| Provide Liquidity | Investors can convert assets into cash quickly through active trading | Allows you to exit investments when you need money |
| Reduce Risk | Markets allow risk to be distributed among many participants through diversification and derivatives | No single person or institution must bear all the risk of a large project |
Understanding financial markets is not just for Wall Street professionals. Every time you open a bank account, take out a student loan, or decide where to save your money, you are participating in the financial market system.
2. Capital Markets vs. Money Markets
Financial markets are divided into two broad categories based on the maturity — the time horizon — of the instruments traded:
| Capital Markets | Money Markets |
|---|---|
| Definition: Markets for long-term securities (maturity > 1 year) | Definition: Markets for short-term, highly liquid instruments (maturity ≤ 1 year) |
| Examples: Stocks, corporate bonds, municipal bonds, mortgages, Treasury bonds | Examples: Treasury bills (T-bills), commercial paper, certificates of deposit (CDs), federal funds |
| Who uses them: Corporations raising equity, governments borrowing long-term, long-term investors | Who uses them: Corporations managing short-term cash, governments, banks managing reserves |
| Risk profile: Higher risk, higher potential return; longer time horizon = more uncertainty | Risk profile: Low risk, low return; near-cash instruments with high liquidity |
| BBYM connection: A BBYM social enterprise would issue stock or bonds in the capital market to raise long-term growth capital | BBYM connection: A BBYM business would park short-term cash reserves in money market instruments while deciding on long-term investments |
3. Primary Market vs. Secondary Market
Within capital markets, we further distinguish between where securities are first created and where they are subsequently traded:
| Primary Market | Secondary Market |
|---|---|
| Where new securities are issued for the very first time. The company or government receives the proceeds. | Where previously issued securities are bought and sold between investors. The company receives no proceeds from these trades. |
| Key transaction: Initial Public Offering (IPO) — when a private company sells shares to the public for the first time | Key institutions: NYSE (New York Stock Exchange), NASDAQ, bond trading desks, electronic markets |
| Investment banks assist companies in pricing and distributing securities | Provides liquidity: investors can exit their positions without the company needing to issue new shares |
| Other examples: Follow-on equity offerings, new bond issuances by corporations or municipalities | Most daily stock market activity — buying Apple on your phone — is secondary market activity |
Key Insight: Why the Secondary Market Matters
You might wonder: if Apple already raised its money from the IPO decades ago, why does secondary market trading matter? The answer is liquidity. Without an active secondary market, very few investors would buy primary market securities in the first place, because they could never get out. Active secondary markets lower the cost of capital for companies, because investors accept lower returns when they know they can sell their shares easily.
You might wonder: if Apple already raised its money from the IPO decades ago, why does secondary market trading matter? The answer is liquidity. Without an active secondary market, very few investors would buy primary market securities in the first place, because they could never get out. Active secondary markets lower the cost of capital for companies, because investors accept lower returns when they know they can sell their shares easily.
4. The Federal Reserve and Monetary Policy
The Federal Reserve ("the Fed") is the central bank of the United States, created in 1913. Its core mission: promote maximum employment and stable prices (low inflation). The Fed does NOT insure deposits (that's the FDIC) and does NOT issue stocks. Its primary influence is on interest rates and the money supply.
| Tool | What It Is | Tighten (Raise Rates) | Stimulate (Lower Rates) |
|---|---|---|---|
| Open Market Operations | Buying or selling U.S. Treasury securities in the open market — the Fed's most frequently used tool | Sell securities → removes money from banking system → rates rise | Buy securities → injects money into banking system → rates fall |
| Federal Funds Rate Target | Target rate at which banks lend reserves to each other overnight — signals the Fed's policy stance | Raise the target rate → all borrowing becomes more expensive | Lower the target rate → borrowing costs fall; businesses and consumers borrow more |
| Reserve Requirements | Minimum fraction of deposits banks must hold in reserve (not lend out) | Raise requirements → banks hold more; less money available to lend | Lower requirements → banks can lend more; money supply expands |
How Rate Changes Affect Everyday Borrowers:
When the Fed raises rates → mortgages, car loans, credit cards, and student loans all become more expensive → consumers borrow less and spend less → economy slows (the Fed's goal when inflation is too high)
When the Fed lowers rates → borrowing costs fall → businesses invest and consumers spend more → economy is stimulated (the Fed's goal in a recession)
The Fed does not control your credit card rate directly, but it sets the benchmark that all lending rates are based on.
When the Fed raises rates → mortgages, car loans, credit cards, and student loans all become more expensive → consumers borrow less and spend less → economy slows (the Fed's goal when inflation is too high)
When the Fed lowers rates → borrowing costs fall → businesses invest and consumers spend more → economy is stimulated (the Fed's goal in a recession)
The Fed does not control your credit card rate directly, but it sets the benchmark that all lending rates are based on.
5. Financial Intermediaries — Who Connects Savers to Borrowers?
A financial intermediary is any institution that channels funds from savers (who have excess money) to borrowers (who need capital). Without intermediaries, a small business owner would need to find individual lenders herself — an impossibly difficult task. Intermediaries solve this by pooling funds and managing information asymmetry.
| Institution | Ownership & Purpose | Services Offered | Best For |
|---|---|---|---|
| Commercial Bank | For-profit; owned by shareholders | Checking/savings accounts, loans, mortgages, business credit; FDIC-insured | Most consumers and businesses; wide geographic reach |
| Credit Union | Nonprofit cooperative; owned by its members | Same services as commercial banks but often lower fees and better rates; NCUA-insured | Members of a specific community, employer, or association; great for underserved borrowers |
| Investment Bank | For-profit; serves corporations and institutions, NOT retail customers | Underwrites IPOs and bond offerings, M&A advisory, securities trading | Large corporations raising capital; NOT for personal checking accounts |
| CDFI | Mission-driven; certified by U.S. Treasury; often nonprofit | Small business loans, mortgages, and financial services for communities underserved by traditional banks | Low-income individuals, minority entrepreneurs, Birmingham-Bessemer community members |
| ⚠️ Payday / Predatory Lender | For-profit; often lightly regulated | Short-term, high-fee loans; targets people with no credit or poor credit history | AVOID — APR often 300–400%; designed to trap borrowers in debt cycles |
| Hedge Fund | Private partnership; for sophisticated/wealthy investors only | Complex investment strategies using leverage and derivatives; high risk, high potential return | Accredited investors only; NOT accessible to typical community members |
6. CDFIs — The BBYM Community Connection
CDFIs are mission-driven lenders certified by the U.S. Department of the Treasury specifically to serve communities underserved by traditional financial institutions — including low-income neighborhoods, minority communities, and rural areas like Birmingham-Bessemer.
Why CDFIs Matter to Birmingham-Bessemer Youth
Traditional banks use credit scores, income history, and collateral requirements that systematically exclude first-generation entrepreneurs, young people without credit history, and residents of lower-income zip codes. A BBYM student who wants to start a business, purchase equipment, or buy their first home may be denied by a commercial bank — not because their idea is bad, but because the system was not designed with them in mind.
CDFIs exist to close this gap. They offer: lower interest rates than payday lenders, technical assistance and financial coaching alongside loans, flexible underwriting that considers character and community ties, and a genuine mission to build wealth — not extract it. Identifying and using CDFIs is one of the most financially empowering skills a BBYM graduate can have.
Traditional banks use credit scores, income history, and collateral requirements that systematically exclude first-generation entrepreneurs, young people without credit history, and residents of lower-income zip codes. A BBYM student who wants to start a business, purchase equipment, or buy their first home may be denied by a commercial bank — not because their idea is bad, but because the system was not designed with them in mind.
CDFIs exist to close this gap. They offer: lower interest rates than payday lenders, technical assistance and financial coaching alongside loans, flexible underwriting that considers character and community ties, and a genuine mission to build wealth — not extract it. Identifying and using CDFIs is one of the most financially empowering skills a BBYM graduate can have.
7. Liquidity — Why It Matters
Liquidity is the ease with which an asset can be converted into cash quickly, without a significant loss in value. This concept directly affects how you manage your money and how financial crises happen.
| High Liquidity (Easy to Convert) | Low Liquidity (Hard to Convert Quickly) |
|---|---|
| Cash in a checking account — already cash | Real estate — takes weeks or months to sell; price depends on market |
| Treasury bills — actively traded; nearly risk-free | Private company shares — no public market; must find a buyer |
| Shares of Apple on NYSE — millions of trades daily | Collectibles (art, antiques) — value is subjective; market is thin |
| Money market fund — designed to maintain $1 value | 10-year corporate bond — can sell but price fluctuates with interest rates |
The Liquidity-Return Trade-off: Investors demand higher returns for holding less liquid assets — the liquidity premium. This is why long-term bonds pay more than T-bills, and why private equity investors expect higher returns than stock market investors. Liquidity has a price, and that price shows up in expected returns.
8. Securitization — Turning Loans Into Tradeable Securities
Securitization is the process of pooling many individual loans (mortgages, car loans, student loans, credit cards) and selling interests in that pool to investors as a new security — typically called an asset-backed security (ABS) or, for mortgages, a mortgage-backed security (MBS).
How Securitization Works — Step by Step:
1. A bank issues 1,000 home mortgages totaling $200 million in loans
2. The bank bundles all 1,000 mortgages into a pool and transfers them to a Special Purpose Vehicle (SPV)
3. The SPV issues securities backed by the mortgage payments — investors receive monthly payments as homeowners pay their mortgages
4. The bank receives cash upfront and can now issue new mortgages — effectively recycling its capital
5. Rating agencies (Moody's, S&P) assign credit ratings to the securities; higher-rated tranches are safer and lower-yielding
1. A bank issues 1,000 home mortgages totaling $200 million in loans
2. The bank bundles all 1,000 mortgages into a pool and transfers them to a Special Purpose Vehicle (SPV)
3. The SPV issues securities backed by the mortgage payments — investors receive monthly payments as homeowners pay their mortgages
4. The bank receives cash upfront and can now issue new mortgages — effectively recycling its capital
5. Rating agencies (Moody's, S&P) assign credit ratings to the securities; higher-rated tranches are safer and lower-yielding
| Benefits of Securitization | Risks of Securitization |
|---|---|
| Frees up capital: banks can issue more loans because they are not stuck holding each mortgage | Complexity and opacity: investors may not fully understand what they own — as seen in 2008 |
| Broadens access to credit: more loans available at lower rates for borrowers | Misaligned incentives: if banks don't keep loans on their books, they may care less about loan quality ("originate to distribute" problem) |
| Spreads risk: thousands of investors share the credit risk of individual mortgages | Systemic risk: widespread losses on securitized products can cascade through the financial system |
| Enables portfolio diversification: investors can own a small piece of thousands of loans | 2008 Financial Crisis: toxic mortgage-backed securities triggered a global financial meltdown when housing prices fell |
9. Derivatives — Contracts Built on Underlying Assets
A derivative is a financial contract whose value is derived from (depends on) the value of an underlying asset — a stock, bond, commodity, currency, or interest rate. Derivatives are used both to manage risk (hedging) and to speculate.
| Type | What It Is | Example | Used To |
|---|---|---|---|
| Option | Right (not obligation) to buy (call) or sell (put) an asset at a set price before a set date | Apple call option: right to buy AAPL at $200 by December | Hedge stock holdings; speculate on price movement with limited downside |
| Future / Forward | Obligation to buy or sell an asset at a set price on a future date | Wheat futures: agree today to buy 5,000 bushels at $6/bushel in March | Lock in prices for commodities; manage input cost uncertainty |
| Swap | Agreement to exchange cash flows based on different rates (e.g., fixed vs. floating interest) | Interest rate swap: pay fixed 4%, receive SOFR (floating) on $10M notional | Convert floating-rate debt to fixed; manage interest rate exposure |
| Credit Default Swap (CDS) | Insurance-like contract; pays out if a borrower defaults | Bank buys CDS on bond portfolio; receives payout if companies default | Hedge credit risk; speculate on creditworthiness of companies |
Important: Derivatives have no value of their own — their value is entirely derived from the underlying asset. A call option on Apple stock is worthless if Apple's stock price does not rise above the strike price. Derivatives amplify both gains and losses, which is why they require deep understanding before use.
10. Predatory Lending — Recognizing and Avoiding Financial Traps
Predatory lending refers to any lending practice that imposes unfair, deceptive, or abusive loan terms on borrowers. Predatory lenders specifically target people with limited financial knowledge, poor credit history, or urgent cash needs — disproportionately impacting low-income and minority communities.
⚠️ Warning Signs of Predatory Lending
• Extremely high interest rates — payday loans often carry APRs of 300–400% or more
• Hidden fees — origination fees, prepayment penalties, balloon payments buried in fine print
• Pressure tactics — "this offer expires today," urgency manufactured to prevent careful reading
• Targeting vulnerable borrowers — marketing specifically to people in financial distress or in low-income zip codes
• Loan flipping — encouraging borrowers to refinance repeatedly, generating new fees each time
• "No credit check required" — often signals predatory terms; responsible lenders evaluate ability to repay
• Extremely high interest rates — payday loans often carry APRs of 300–400% or more
• Hidden fees — origination fees, prepayment penalties, balloon payments buried in fine print
• Pressure tactics — "this offer expires today," urgency manufactured to prevent careful reading
• Targeting vulnerable borrowers — marketing specifically to people in financial distress or in low-income zip codes
• Loan flipping — encouraging borrowers to refinance repeatedly, generating new fees each time
• "No credit check required" — often signals predatory terms; responsible lenders evaluate ability to repay
The cost difference is stark. Here is what the same $500 need looks like across institution types:
⚠️ Payday Lender
391%
$500 loan, $75 fee for 2 weeks. If you cannot repay in 2 weeks, you roll over — paying another $75. In 3 months you have paid $450 in fees and still owe the original $500.
✓ CDFI / Credit Union
18%
$500 loan at 18% APR, 12-month repayment = $46/month. Total interest paid ≈ $55 for the entire year — saving $395 compared to the payday lender.
That $395 difference is enough to pay for a semester of community college textbooks. Identifying and using mission-aligned financial institutions is wealth-building knowledge, not just personal finance trivia.
11. The FDIC — Your Deposit Protection
The Federal Deposit Insurance Corporation (FDIC) was created in 1933 in response to the bank runs of the Great Depression. The FDIC insures depositor accounts at member banks up to $250,000 per depositor, per institution, per account category.
| Institution Type | Deposit Insurance | Coverage |
|---|---|---|
| Commercial Bank | FDIC | $250,000 per depositor per institution — checking, savings, CDs |
| Credit Union | NCUA (National Credit Union Administration) | $250,000 per member per institution — equivalent protection to FDIC |
| Investment Accounts (stocks, bonds, mutual funds) | NOT insured by FDIC | No deposit insurance — market risk is borne by investor |
| Payday Lenders / Check Cashers | NOT insured | Another reason to avoid them entirely |
BBYM Connection: One of the most fundamental financial safety habits is keeping your money at FDIC-insured institutions. Students who keep cash "under the mattress" or in uninsured accounts risk total loss. Checking that your bank is FDIC-insured takes 30 seconds at fdic.gov.
12. Stock Exchanges — NYSE and NASDAQ
Stock exchanges are the organized marketplaces where publicly traded securities are bought and sold on the secondary market.
| New York Stock Exchange (NYSE) | NASDAQ |
|---|---|
| Founded 1792; oldest and largest U.S. exchange by total market capitalization | Founded 1971; first fully electronic stock exchange in the world |
| Physical trading floor in lower Manhattan; auction-based price discovery | Fully electronic; no physical trading floor; market-maker model |
| Home to blue-chip industrial companies: JPMorgan, Coca-Cola, ExxonMobil, Walmart | Home to major technology companies: Apple, Microsoft, Amazon, Meta, Google |
| Known for tradition, established companies, strict listing requirements | Known for innovation, growth companies, and technology sector |
Both NYSE and NASDAQ are secondary markets. When you buy Apple stock on your phone app, Apple receives no money — you are buying from another investor. Apple only received proceeds when it first issued stock in its 1980 IPO on the primary market.
Part 2 — Key Terms Defined
Master all 18 terms — they will appear on the Unit 2 assessment and form your vocabulary for the entire curriculum
Capital Market
A financial market for long-term securities with maturities greater than one year, including stocks, corporate bonds, and mortgages. Source of long-term financing for corporations and governments.
Money Market
A market for short-term debt instruments with maturities of one year or less — including Treasury bills, commercial paper, and CDs. Characteristics: high liquidity, low risk, low return.
Primary Market
The market where new securities are issued for the very first time, with proceeds going to the issuing entity. The IPO is the most common primary market transaction.
Secondary Market
The market where previously issued securities are bought and sold between investors. NYSE and NASDAQ are secondary markets. No money flows to the original issuer.
IPO (Initial Public Offering)
The first time a private company sells its shares to the public on the primary market. Investment banks typically underwrite and distribute IPO shares, setting the initial price and finding buyers.
Federal Reserve ("the Fed")
The central bank of the United States, created in 1913. Controls monetary policy through open market operations, the federal funds rate, and reserve requirements to promote maximum employment and stable prices (low inflation).
Open Market Operations
The Fed's most frequently used tool: buying or selling U.S. Treasury securities to inject or remove money from the banking system, thereby influencing interest rates. Buying = stimulates; selling = tightens.
Federal Funds Rate
The target interest rate at which banks lend their reserve balances to each other overnight. The key benchmark that influences all other interest rates in the economy — mortgages, car loans, credit cards, business loans.
Financial Intermediary
An institution that channels funds from savers (surplus units) to borrowers (deficit units). Includes banks, credit unions, investment banks, insurance companies, and CDFIs. Intermediaries solve information asymmetry and reduce transaction costs.
Commercial Bank
A for-profit financial institution that accepts deposits, offers checking and savings accounts, and makes loans to individuals and businesses. Deposits insured by the FDIC up to $250,000.
Credit Union
A nonprofit, member-owned financial cooperative that offers the same services as a commercial bank but typically at lower fees and better rates. Insured by the NCUA. Membership requires meeting eligibility criteria (employer, community, association).
Investment Bank
A financial institution that helps corporations and governments raise capital by underwriting and distributing securities. Does NOT accept consumer deposits. Examples: Goldman Sachs, Morgan Stanley. Revenue comes from underwriting fees, advisory fees, and trading profits.
CDFI (Community Development Financial Institution)
A Treasury-certified, mission-driven lender that provides financial services — loans, accounts, counseling — to underserved communities. CDFIs offer flexible underwriting, below-market rates, and technical assistance. A key wealth-building resource for BBYM communities.
Liquidity
The ease with which an asset can be quickly converted into cash without significant loss of value. Cash is perfectly liquid; real estate is illiquid. Investors demand a liquidity premium for illiquid assets — they require higher expected returns to compensate for being "locked in."
Securitization
The process of pooling individual loans (mortgages, auto loans) and selling interests in the pool as a new security to investors. Frees up bank capital for new lending, broadens access to credit, but also creates systemic risk if done irresponsibly — as seen in the 2008 financial crisis.
Derivative
A financial contract whose value is derived from an underlying asset (stock, bond, commodity, currency, or interest rate). Types include options (right to buy/sell), futures/forwards (obligation to buy/sell), and swaps (exchange of cash flows). Used for hedging and speculation.
FDIC (Federal Deposit Insurance Corporation)
Insures bank deposits up to $250,000 per depositor per institution. Created in 1933 to prevent bank runs and protect depositors. Does NOT cover investment accounts (stocks, bonds, mutual funds). Verify coverage at fdic.gov.
Predatory Lending
Lending practices that exploit borrowers through deceptive terms, excessive fees, and targeting vulnerable populations. Characterized by very high APRs (often 300%+), hidden charges, and pressure tactics. Disproportionately harms low-income and minority communities.
Part 3 — Formulas & Calculations
Unit 2 is concept-heavy, but these three calculations appear on the assessment
Formula 1 — Payday Loan APR
The most important calculation in Unit 2. Recognizing how predatory lending fees translate to extremely high APRs is core financial literacy.
Payday Loan APR Calculation
APR = (Fee ÷ Loan Amount) × (365 ÷ Loan Term in Days)
Example: $75 fee on a $500 loan for 14 days:
APR = (75 ÷ 500) × (365 ÷ 14) = 0.15 × 26.07 = 391%
Compare to a credit union personal loan at 18% APR — the payday loan costs 21× more on an annualized basis.
APR = (75 ÷ 500) × (365 ÷ 14) = 0.15 × 26.07 = 391%
Compare to a credit union personal loan at 18% APR — the payday loan costs 21× more on an annualized basis.
Practice problem: A payday lender charges $60 on a 2-week, $400 loan.
APR = ($60 ÷ $400) × (365 ÷ 14) = 0.15 × 26.07 = 391%
If rolled over once: total fees paid = $60 × 2 = $120 on a $400 loan in one month.
Credit union at 20% APR over 6 months: total interest = approx. $400 × 20% × (6/12) = $40. Difference: $80+ saved by choosing the right institution.
APR = ($60 ÷ $400) × (365 ÷ 14) = 0.15 × 26.07 = 391%
If rolled over once: total fees paid = $60 × 2 = $120 on a $400 loan in one month.
Credit union at 20% APR over 6 months: total interest = approx. $400 × 20% × (6/12) = $40. Difference: $80+ saved by choosing the right institution.
Formula 2 — Money Multiplier
When the Fed changes reserve requirements, it affects how much money banks can create through lending.
Money Multiplier Formula
Money Multiplier = 1 ÷ Reserve Requirement
Example: If reserve requirement = 10% (0.10):
Money Multiplier = 1 ÷ 0.10 = 10×
Every $1,000 deposited can theoretically become $10,000 in the banking system through repeated lending. This is why lowering reserve requirements stimulates the economy — banks can lend more from each dollar deposited.
Money Multiplier = 1 ÷ 0.10 = 10×
Every $1,000 deposited can theoretically become $10,000 in the banking system through repeated lending. This is why lowering reserve requirements stimulates the economy — banks can lend more from each dollar deposited.
Worked Example — Reserve Requirements (Q14 type):
Fed sets reserve requirement = 8%. Community bank receives $25,000 in new deposits.
(a) Reserves required = $25,000 × 8% = $2,000
(b) Amount available to lend = $25,000 − $2,000 = $23,000
(c) Money Multiplier = 1 ÷ 0.08 = 12.5×
Maximum money creation = $25,000 × 12.5 = $312,500 theoretical maximum in the banking system
Fed sets reserve requirement = 8%. Community bank receives $25,000 in new deposits.
(a) Reserves required = $25,000 × 8% = $2,000
(b) Amount available to lend = $25,000 − $2,000 = $23,000
(c) Money Multiplier = 1 ÷ 0.08 = 12.5×
Maximum money creation = $25,000 × 12.5 = $312,500 theoretical maximum in the banking system
Formula 3 — Liquidity Ranking
On the assessment you may be asked to rank assets by liquidity from most to least liquid. The correct order — and the logic behind it:
1
Cash in checking account
Already cash — perfectly liquid
2
T-bill (60 days to maturity)
Sell in days at near-face value
3
Shares of Apple (NYSE)
Sell in seconds; settles in 2 days
4
30-year Treasury bond
Tradeable but price fluctuates with rates
5
Your family's home
Weeks to months; high transaction costs
6
Shares of a private startup
No public market; can take years
Part 4 — Institution Comparison Guide
A side-by-side reference for the institution types most likely to appear on your assessment — know these distinctions cold
Commercial Bank vs. Credit Union vs. CDFI
| Feature | Commercial Bank | Credit Union | CDFI |
|---|---|---|---|
| Ownership | Shareholders (for-profit) | Members (nonprofit cooperative) | Mission-driven nonprofit or low-profit |
| Primary Goal | Generate profit for shareholders | Serve member interests at low cost | Build wealth in underserved communities |
| Who Can Join? | Anyone (open to the public) | Must meet membership criteria (employer, community, association) | Anyone in the target community; focused on underserved |
| Deposit Insurance | FDIC — up to $250,000 | NCUA — up to $250,000 | Varies; many are FDIC or NCUA insured |
| Loan Terms | Market rate; credit score and income required | Often better rates than commercial banks; member focus | Flexible underwriting; below-market rates; technical assistance |
| Accessibility | Widespread; online banking; branches everywhere | Limited to members; fewer branches but growing online | Focused in specific communities; limited branches |
| Best For BBYM Youth | General banking needs once credit is established | First banking relationship; lower fees; community focus | Business loans, home purchase, when turned down by banks |
Investment Bank vs. Commercial Bank — A Critical Distinction
Students frequently confuse investment banks and commercial banks. This distinction is heavily tested:
| Commercial Bank (e.g., Wells Fargo, Regions Bank) | Investment Bank (e.g., Goldman Sachs, Morgan Stanley) |
|---|---|
| Accepts deposits from the public (checking, savings accounts) | Does NOT accept consumer deposits |
| Makes loans to individuals and businesses | Does NOT make retail loans |
| Regulated by the Federal Reserve, FDIC, OCC | Regulated primarily by the SEC |
| Revenue: interest income from loans, account fees | Revenue: underwriting fees, advisory fees, trading profits |
| FDIC-insured: Yes | FDIC-insured: No (no deposits to insure) |
| Community role: primary banking services for individuals and small businesses | Community role: none directly — serves corporations, governments, and large institutions |
The key test question: "Can you open a checking account at Goldman Sachs?" No. Goldman Sachs is an investment bank — it does not accept consumer deposits, does not make personal loans, and is not FDIC-insured in the way that commercial banks are. It serves corporations, governments, and institutional investors — not individuals like BBYM community members.
First Bank Account Guide for BBYM Students Turning 18
Which institution to choose: Start with a credit union or CDFI if one is accessible in Birmingham-Bessemer. You get lower fees, better rates, and a community-focused relationship. If not available, choose a community bank or regional bank with no monthly fees.
What to look for: No minimum balance requirements · No monthly maintenance fees · Free debit card · Mobile banking · Free access to ATMs in your area · Clear overdraft policy
One red flag to avoid: Any account with monthly fees you cannot waive by maintaining a minimum balance or setting up direct deposit. A $15/month fee = $180/year — money that should be building your savings.
Verify FDIC/NCUA insurance: Go to fdic.gov (for banks) or ncua.gov (for credit unions) and search the institution's name. Takes 30 seconds. If an institution is not in the database, do not deposit your money there.
What to look for: No minimum balance requirements · No monthly maintenance fees · Free debit card · Mobile banking · Free access to ATMs in your area · Clear overdraft policy
One red flag to avoid: Any account with monthly fees you cannot waive by maintaining a minimum balance or setting up direct deposit. A $15/month fee = $180/year — money that should be building your savings.
Verify FDIC/NCUA insurance: Go to fdic.gov (for banks) or ncua.gov (for credit unions) and search the institution's name. Takes 30 seconds. If an institution is not in the database, do not deposit your money there.
Part 5 — Review & Practice Questions
Answer in your own words — these mirror the Unit 2 assessment and real-world financial decision-making
Write your answer first — then click to reveal. Cover the answer and test yourself!
Conceptual Questions
Q1
Explain the difference between a primary market and a secondary market. When you buy shares of a company on Robinhood, which market are you participating in? Does the company receive any money from your purchase?
▼
The primary market is where new securities are issued for the very first time — the issuing company or government receives the proceeds. The most common primary market event is an IPO, where a private company sells shares to the public for the first time.
The secondary market is where previously issued securities are bought and sold between investors. The original issuer receives nothing from these transactions.
When you buy shares on Robinhood, you are participating in the secondary market. You are buying from another investor who already owned those shares — not from the company itself. The company receives no money from your purchase. The company only received proceeds when it first issued those shares (in its IPO or follow-on offering on the primary market).
This is a commonly tested distinction: secondary market volume is enormous (billions of shares traded daily), but none of that money reaches the companies being traded.
The secondary market is where previously issued securities are bought and sold between investors. The original issuer receives nothing from these transactions.
When you buy shares on Robinhood, you are participating in the secondary market. You are buying from another investor who already owned those shares — not from the company itself. The company receives no money from your purchase. The company only received proceeds when it first issued those shares (in its IPO or follow-on offering on the primary market).
This is a commonly tested distinction: secondary market volume is enormous (billions of shares traded daily), but none of that money reaches the companies being traded.
Q2
The Federal Reserve decides to lower the federal funds rate. Walk through the chain of effects: What happens to commercial bank lending rates? What happens to mortgage rates? What effect might this have on the Birmingham-Bessemer housing market?
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When the Fed lowers the federal funds rate, the chain of effects flows as follows:
1. Federal funds rate drops → banks can borrow reserves from each other more cheaply → their cost of funding falls
2. Commercial bank lending rates fall → banks pass lower funding costs to borrowers → business loans, car loans, and personal loans become cheaper
3. Mortgage rates fall → home financing becomes more affordable → monthly payments on new mortgages drop
4. Birmingham-Bessemer housing market effects: Lower mortgage rates increase affordability for first-time buyers — many of whom are BBYM community members who may have previously been priced out. Demand for homes rises, which can increase home prices. For existing homeowners, lower rates create refinancing opportunities — reducing monthly payments and freeing up cash. However, if prices rise too quickly, affordability gains from lower rates can be offset.
The Fed's rate cut is also a signal: it typically means the Fed sees the economy weakening and is trying to stimulate activity. This may affect employment and income in the region as well.
1. Federal funds rate drops → banks can borrow reserves from each other more cheaply → their cost of funding falls
2. Commercial bank lending rates fall → banks pass lower funding costs to borrowers → business loans, car loans, and personal loans become cheaper
3. Mortgage rates fall → home financing becomes more affordable → monthly payments on new mortgages drop
4. Birmingham-Bessemer housing market effects: Lower mortgage rates increase affordability for first-time buyers — many of whom are BBYM community members who may have previously been priced out. Demand for homes rises, which can increase home prices. For existing homeowners, lower rates create refinancing opportunities — reducing monthly payments and freeing up cash. However, if prices rise too quickly, affordability gains from lower rates can be offset.
The Fed's rate cut is also a signal: it typically means the Fed sees the economy weakening and is trying to stimulate activity. This may affect employment and income in the region as well.
Q3
A friend tells you: "Credit unions are the same thing as banks — just with a different name." Do you agree? Write 3–4 sentences explaining the key differences in ownership, purpose, and benefit to customers.
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Disagree. The differences are fundamental, not cosmetic.
Ownership: Commercial banks are for-profit corporations owned by shareholders whose goal is profit maximization. Credit unions are nonprofit cooperatives owned by their members — when you deposit money at a credit union, you become a partial owner with voting rights.
Purpose: Banks exist to generate returns for shareholders. Credit unions exist to serve their members' financial needs at the lowest possible cost — any surplus is returned to members through lower loan rates, higher savings rates, or reduced fees.
Benefit to customers: Because credit unions are not extracting profit for outside shareholders, they typically offer lower loan interest rates, fewer account fees, and higher savings rates than comparable commercial banks. For BBYM community members starting their financial lives, a credit union can save hundreds of dollars per year in fees alone.
Ownership: Commercial banks are for-profit corporations owned by shareholders whose goal is profit maximization. Credit unions are nonprofit cooperatives owned by their members — when you deposit money at a credit union, you become a partial owner with voting rights.
Purpose: Banks exist to generate returns for shareholders. Credit unions exist to serve their members' financial needs at the lowest possible cost — any surplus is returned to members through lower loan rates, higher savings rates, or reduced fees.
Benefit to customers: Because credit unions are not extracting profit for outside shareholders, they typically offer lower loan interest rates, fewer account fees, and higher savings rates than comparable commercial banks. For BBYM community members starting their financial lives, a credit union can save hundreds of dollars per year in fees alone.
Q4
What is securitization? Describe in plain language how it works, one benefit, and one risk. How did securitization contribute to the 2008 financial crisis?
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Securitization in plain language: A bank makes 1,000 home loans. Instead of waiting 30 years for borrowers to repay, the bank bundles all 1,000 loans together and sells that bundle to investors as a new security (a mortgage-backed security). Investors receive monthly payments as homeowners pay their mortgages. The bank gets cash immediately and can make new loans — recycling its capital.
One benefit: Securitization enables banks to offer more loans at lower rates because they are not stuck holding every loan they originate. More capital circulates → more loans available → more people can buy homes or finance businesses.
One risk: The "originate to distribute" problem — when banks know they will sell loans to investors immediately, they have less incentive to carefully evaluate each borrower's creditworthiness. Loan quality can decline because the bank no longer bears the risk of default.
2008 connection: Banks issued millions of subprime mortgages — loans to borrowers with weak credit histories — and securitized them into complex MBS products that received high credit ratings. When housing prices fell and borrowers defaulted en masse, these securities collapsed in value. Because they were held by financial institutions worldwide, the losses cascaded through the global financial system — triggering a financial crisis and the worst recession since the Great Depression.
One benefit: Securitization enables banks to offer more loans at lower rates because they are not stuck holding every loan they originate. More capital circulates → more loans available → more people can buy homes or finance businesses.
One risk: The "originate to distribute" problem — when banks know they will sell loans to investors immediately, they have less incentive to carefully evaluate each borrower's creditworthiness. Loan quality can decline because the bank no longer bears the risk of default.
2008 connection: Banks issued millions of subprime mortgages — loans to borrowers with weak credit histories — and securitized them into complex MBS products that received high credit ratings. When housing prices fell and borrowers defaulted en masse, these securities collapsed in value. Because they were held by financial institutions worldwide, the losses cascaded through the global financial system — triggering a financial crisis and the worst recession since the Great Depression.
Q5
Why would a BBYM entrepreneur be better served by a CDFI than a payday lender? Compare the typical terms and explain the long-run wealth impact of each choice.
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Terms comparison for a $500 emergency need:
Payday lender: $75 fee for 14 days = 391% APR. If rolled over once: $150 in fees in one month, still owing the original $500.
CDFI: $500 loan at 18% APR, 12-month repayment = approximately $46/month, $55 total interest for the year.
Long-run wealth impact of payday lending: The debt trap is real. A borrower who rolls over a $500 payday loan for just 3 months has paid $450+ in fees — money that is permanently lost. Payday loan usage is associated with increased financial stress, difficulty saving, and inability to build credit history (since most payday lenders do not report positive payment history to credit bureaus).
Long-run wealth impact of CDFI: The CDFI loan builds credit history (reported to bureaus), costs a fraction of payday fees, and often comes with financial coaching. A BBYM entrepreneur who establishes a relationship with a CDFI, repays the loan on time, and builds credit has opened a pathway to larger future loans at better rates — the beginning of a sustainable capital access trajectory.
The difference is not just $395 in fees — it is the difference between being trapped in a debt cycle and building the financial infrastructure for wealth creation.
Payday lender: $75 fee for 14 days = 391% APR. If rolled over once: $150 in fees in one month, still owing the original $500.
CDFI: $500 loan at 18% APR, 12-month repayment = approximately $46/month, $55 total interest for the year.
Long-run wealth impact of payday lending: The debt trap is real. A borrower who rolls over a $500 payday loan for just 3 months has paid $450+ in fees — money that is permanently lost. Payday loan usage is associated with increased financial stress, difficulty saving, and inability to build credit history (since most payday lenders do not report positive payment history to credit bureaus).
Long-run wealth impact of CDFI: The CDFI loan builds credit history (reported to bureaus), costs a fraction of payday fees, and often comes with financial coaching. A BBYM entrepreneur who establishes a relationship with a CDFI, repays the loan on time, and builds credit has opened a pathway to larger future loans at better rates — the beginning of a sustainable capital access trajectory.
The difference is not just $395 in fees — it is the difference between being trapped in a debt cycle and building the financial infrastructure for wealth creation.
Calculation Practice
Q6
A payday lender charges $60 on a 2-week, $400 loan. (a) Calculate the APR. (b) If the borrower rolls over the loan once, how much has she paid in fees? (c) Compare to a credit union offering $400 at 20% APR over 6 months.
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(a) APR = (Fee ÷ Loan Amount) × (365 ÷ Loan Term in Days)
APR = ($60 ÷ $400) × (365 ÷ 14) = 0.15 × 26.07 = 391%
(b) If rolled over once: she pays $60 at the end of week 2, then another $60 to extend for another 2 weeks. Total fees paid = $120 in one month. She still owes the original $400.
(c) Credit union loan at 20% APR over 6 months:
Total interest = $400 × 20% × (6 ÷ 12) = $400 × 0.10 = $40 total interest
Monthly payment ≈ $400 ÷ 6 + small interest component ≈ approximately $70/month
Savings vs. one payday rollover: $120 − $40 = $80 saved by choosing the credit union. On a per-dollar basis, the payday loan costs nearly 10× more.
APR = ($60 ÷ $400) × (365 ÷ 14) = 0.15 × 26.07 = 391%
(b) If rolled over once: she pays $60 at the end of week 2, then another $60 to extend for another 2 weeks. Total fees paid = $120 in one month. She still owes the original $400.
(c) Credit union loan at 20% APR over 6 months:
Total interest = $400 × 20% × (6 ÷ 12) = $400 × 0.10 = $40 total interest
Monthly payment ≈ $400 ÷ 6 + small interest component ≈ approximately $70/month
Savings vs. one payday rollover: $120 − $40 = $80 saved by choosing the credit union. On a per-dollar basis, the payday loan costs nearly 10× more.
Q7
Rank these assets from MOST liquid to LEAST liquid and explain your reasoning: (a) Cash in savings account (b) 30-year Treasury bond (c) Shares of Apple stock (d) Your family's home (e) T-bill with 60 days to maturity (f) Shares of a private startup.
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Most liquid → Least liquid:
1. Cash in savings account — instantly accessible; already cash. Only constraint is the withdrawal process (same-day or next-day).
2. T-bill (60 days to maturity) — government-backed, actively traded, essentially risk-free; can be sold in the secondary market within days at near-face value. Slightly less liquid than cash only because it requires a sale transaction.
3. Shares of Apple stock — millions of trades daily on NYSE/NASDAQ; sell in seconds, settle in 2 business days. Very high liquidity, but subject to price fluctuation between decision to sell and settlement.
4. 30-year Treasury bond — tradeable in the secondary market but price fluctuates significantly with interest rates; longer duration means more price sensitivity. Still liquid relative to real assets, but requires more time to find optimal pricing.
5. Your family's home — requires weeks to months to sell; significant transaction costs (agent commissions, closing costs, legal fees); price is subject to local market conditions and buyer availability.
6. Shares of a private startup — no public market exists; finding a buyer may take months or years; value is highly uncertain; legal restrictions on transfer may apply. Least liquid of all the options listed.
1. Cash in savings account — instantly accessible; already cash. Only constraint is the withdrawal process (same-day or next-day).
2. T-bill (60 days to maturity) — government-backed, actively traded, essentially risk-free; can be sold in the secondary market within days at near-face value. Slightly less liquid than cash only because it requires a sale transaction.
3. Shares of Apple stock — millions of trades daily on NYSE/NASDAQ; sell in seconds, settle in 2 business days. Very high liquidity, but subject to price fluctuation between decision to sell and settlement.
4. 30-year Treasury bond — tradeable in the secondary market but price fluctuates significantly with interest rates; longer duration means more price sensitivity. Still liquid relative to real assets, but requires more time to find optimal pricing.
5. Your family's home — requires weeks to months to sell; significant transaction costs (agent commissions, closing costs, legal fees); price is subject to local market conditions and buyer availability.
6. Shares of a private startup — no public market exists; finding a buyer may take months or years; value is highly uncertain; legal restrictions on transfer may apply. Least liquid of all the options listed.
Q8
The Fed sets a reserve requirement of 8%. A community bank receives $25,000 in new deposits. (a) How much must it hold in reserve? (b) How much can it lend? (c) What is the theoretical maximum amount of money that could be created in the banking system?
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(a) Reserves required = $25,000 × 8% = $2,000
(b) Amount available to lend = $25,000 − $2,000 = $23,000
(c) Money Multiplier = 1 ÷ Reserve Requirement = 1 ÷ 0.08 = 12.5×
Theoretical maximum money creation = $25,000 × 12.5 = $312,500
Interpretation: The original $25,000 deposit can theoretically generate $312,500 in the banking system through repeated lending. The community bank lends $23,000 → the recipient deposits at another bank → that bank lends 92% of it → and so on. In practice, the actual multiplier is lower because not all money is redeposited and banks hold excess reserves.
(b) Amount available to lend = $25,000 − $2,000 = $23,000
(c) Money Multiplier = 1 ÷ Reserve Requirement = 1 ÷ 0.08 = 12.5×
Theoretical maximum money creation = $25,000 × 12.5 = $312,500
Interpretation: The original $25,000 deposit can theoretically generate $312,500 in the banking system through repeated lending. The community bank lends $23,000 → the recipient deposits at another bank → that bank lends 92% of it → and so on. In practice, the actual multiplier is lower because not all money is redeposited and banks hold excess reserves.
Critical Thinking — BBYM Community Connection
Q9
Identify two financial institutions that serve the Birmingham-Bessemer community. For each: (a) What type of institution is it? (b) What services does it offer? (c) How does it serve — or fail to serve — residents building wealth for the first time?
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This is a research exercise — use this framework to evaluate any local institution:
Questions to investigate for each institution:
• Is it a commercial bank, credit union, or CDFI?
• Is it FDIC or NCUA insured? (Verify at fdic.gov or ncua.gov)
• What are the account minimums and fees?
• Does it offer small business loans? At what rates and requirements?
• Does it offer financial literacy programming or counseling?
• What is the minimum credit score required for a personal loan?
• Does it have branches in Bessemer and surrounding areas?
Examples to research in the Birmingham-Bessemer area: Alabama One Credit Union (credit union), Peoples Independent Bancorp, Legacy Community Federal Credit Union, TruFund Financial Services (CDFI), and Accion Opportunity Fund (CDFI serving small businesses).
Evaluate each against the community wealth framework: Does ownership stay local? Do employees reflect the community? Do profits recirculate locally?
Questions to investigate for each institution:
• Is it a commercial bank, credit union, or CDFI?
• Is it FDIC or NCUA insured? (Verify at fdic.gov or ncua.gov)
• What are the account minimums and fees?
• Does it offer small business loans? At what rates and requirements?
• Does it offer financial literacy programming or counseling?
• What is the minimum credit score required for a personal loan?
• Does it have branches in Bessemer and surrounding areas?
Examples to research in the Birmingham-Bessemer area: Alabama One Credit Union (credit union), Peoples Independent Bancorp, Legacy Community Federal Credit Union, TruFund Financial Services (CDFI), and Accion Opportunity Fund (CDFI serving small businesses).
Evaluate each against the community wealth framework: Does ownership stay local? Do employees reflect the community? Do profits recirculate locally?
Q10
The Fed just announced it is raising interest rates to fight inflation. Write a 5-sentence paragraph explaining: (a) What tool the Fed likely used, (b) The immediate effect on borrowing costs, (c) How a Bessemer small business owner with a variable-rate loan would be affected, and (d) What she could do to protect herself.
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The Fed most likely used open market operations — selling U.S. Treasury securities to remove money from the banking system — combined with raising its federal funds rate target, signaling to all banks that the benchmark overnight lending rate has increased. The immediate effect is that all variable lending rates rise: mortgage rates, business credit lines, car loan rates, and credit card APRs all adjust upward as banks pass their higher funding costs to borrowers. A Bessemer small business owner with a variable-rate business line of credit will see her monthly interest payments increase, potentially significantly — if she borrowed $100,000 at prime + 2% and the prime rate rises by 1%, her annual interest cost increases by $1,000, reducing her cash flow and ability to invest in growth. To protect herself, she should: (1) explore converting her variable-rate debt to a fixed-rate loan before rates rise further, locking in today's rate; (2) contact her CDFI or credit union about refinancing options; (3) build a cash reserve cushion to absorb higher payments; and (4) delay discretionary capital expenditures until the rate environment stabilizes. Understanding the Fed's tools and their transmission effects is what separates a financially empowered entrepreneur from one who is blindsided by economic conditions.
Q11
Design a 1-page "Financial Institution Guide" for a BBYM student who just turned 18 and needs to open their first bank account. Include: which type of institution to choose, what to look for, one red flag to avoid, and how to verify FDIC or NCUA insurance.
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BBYM First Bank Account Guide
Which institution to choose: Start with a credit union or CDFI if one is accessible in your community. You get lower fees, community focus, and a member relationship. If not available, choose a community bank or regional bank — not a payday lender or check casher.
What to look for in an account:
✓ No monthly maintenance fees (or easy-to-meet waiver conditions)
✓ No minimum balance requirement to open or maintain
✓ Free debit card and mobile banking app
✓ Free or low-cost ATM access in your area
✓ Transparent overdraft policy — avoid accounts that charge $35+ per overdraft
✓ Reports to ChexSystems (shows good banking behavior, helps you build your banking history)
One red flag to avoid: Monthly maintenance fees you cannot waive. A $15/month fee = $180/year — money that should be building your savings. Walk away.
How to verify FDIC/NCUA insurance:
For banks → fdic.gov → "BankFind" tool → search the institution name → confirm FDIC certificate number
For credit unions → ncua.gov → "Research a Credit Union" → search by name or charter number
Takes 30 seconds. If the institution is not listed, do not deposit your money there.
Which institution to choose: Start with a credit union or CDFI if one is accessible in your community. You get lower fees, community focus, and a member relationship. If not available, choose a community bank or regional bank — not a payday lender or check casher.
What to look for in an account:
✓ No monthly maintenance fees (or easy-to-meet waiver conditions)
✓ No minimum balance requirement to open or maintain
✓ Free debit card and mobile banking app
✓ Free or low-cost ATM access in your area
✓ Transparent overdraft policy — avoid accounts that charge $35+ per overdraft
✓ Reports to ChexSystems (shows good banking behavior, helps you build your banking history)
One red flag to avoid: Monthly maintenance fees you cannot waive. A $15/month fee = $180/year — money that should be building your savings. Walk away.
How to verify FDIC/NCUA insurance:
For banks → fdic.gov → "BankFind" tool → search the institution name → confirm FDIC certificate number
For credit unions → ncua.gov → "Research a Credit Union" → search by name or charter number
Takes 30 seconds. If the institution is not listed, do not deposit your money there.
Part 6 — Quick Reference Summary
One-page review — read this the night before the assessment
Unit 2 in 6 Essential Sentences
Sentence 1
Financial markets channel money from savers to borrowers — capital markets handle long-term financing (stocks, bonds), money markets handle short-term instruments (T-bills, commercial paper).
Sentence 2
Securities are first created in the primary market (IPO) and then traded between investors in the secondary market (NYSE, NASDAQ) — only the primary market sends money to the issuing company.
Sentence 3
The Federal Reserve controls monetary policy through three tools: open market operations (buying/selling Treasuries — most used), the federal funds rate (the benchmark for all borrowing), and reserve requirements (how much banks must hold).
Sentence 4
Financial intermediaries — banks, credit unions, investment banks, CDFIs — connect savers to borrowers; CDFIs are the mission-aligned choice for underserved communities because they offer flexible underwriting, below-market rates, and genuine wealth-building support.
Sentence 5
Liquidity is how quickly an asset converts to cash without losing value; securitization bundles loans into tradeable securities; derivatives get their value from underlying assets — all three concepts appeared centrally in the 2008 financial crisis.
Sentence 6
Predatory lenders (payday loans, 300%+ APR) target the community — the alternative is CDFIs and credit unions — and recognizing this difference is one of the most financially empowering skills a BBYM graduate can have.
Must-Know Facts for the Assessment
| Question You Will See | The Right Answer |
|---|---|
| Where does an IPO occur? | Primary market |
| Where does daily stock trading occur? | Secondary market |
| Which Fed tool is used most often? | Open market operations |
| What does the Fed do to stimulate the economy? | Lowers the federal funds rate (and/or buys Treasury securities) |
| Credit union vs. commercial bank — ownership? | Credit union = member-owned nonprofit; bank = shareholder-owned for-profit |
| Does an investment bank accept deposits? | No — investment banks do NOT accept consumer deposits |
| What is a T-bill? | A money market instrument — short-term U.S. government debt (maturity ≤ 1 year) |
| What does the FDIC do? | Insures bank deposits up to $250,000 per depositor per institution |
| Sign of predatory lending? | Extremely high APR (300%+), hidden fees, pressure tactics, targeting vulnerable borrowers |
| What is a derivative? | A contract whose value is derived from an underlying asset |
| What is securitization? | Pooling loans and selling them as securities to investors |
| Best lender for underserved BBYM community? | CDFI or community credit union |
| Payday loan APR formula? | (Fee ÷ Loan Amount) × (365 ÷ Loan Term in Days) |
| Money multiplier formula? | 1 ÷ Reserve Requirement |
| Most liquid asset type? | Cash (or T-bills as the most liquid non-cash instrument) |
| What is the federal funds rate? | The rate banks charge each other for overnight loans of reserves — the Fed's key benchmark rate |