Money, Banking, and International Financecompany’s stock. Furthermore, the mutual fund company may issue a fixed number of shares to
the fund that we call closed-end mutual funds. Then investors may buy and sell these shares in
over-the-counter markets, just like stock. Thus, the mutual fund company does not buy its shares
back for closed-end mutual funds. A mutual fund company may offer another alternative called
open-ended mutual funds. Mutual fund company can buy back shares to the fund, and the price
of the shares becomes tied to the value of the stock in the fund. Finally, the mutual fund
managers use two methods to earn profits. First, fund managers charge management fees for no-
load funds, usually 0.5% of asset value. For the second method, the fund managers charge a
commission for selling or purchasing of shares for load funds. The load reflects the commission
that lowers the fund’s value.
Money-market mutual funds are similar to mutual funds. However, the fund manager buys
only money market securities, and the fund excludes corporate stock. Theory behind money-
market mutual funds is simple. If you have five friends with $2,000 each, and they want to buy a
Treasury bill with a minimum face value of $10,000, then your friends can pool their money
together and buy one T-bill. Once the T-bill matured, your friends split the interest among
themselves.
Money-market mutual funds are very popular because these funds offer check-writing
privileges, and some investors do not want to tie up their funds for a long time. Moreover, the
value of the fund does not change much, when interest rates changes because money market
securities have maturities less than one year. In 2008, money-market mutual funds had assets of
$3.8 trillion.
Commercial banks offer money market deposit accounts that are similar to the money-
market mutual fund. Two funds differ because the Federal Deposit Insurance Corporation
(FDIC) insures the money market deposit accounts, while it does not insure money-market
mutual funds. If your bank bankrupted and you invested in money market deposit accounts,
subsequently, you are guaranteed not to lose you funds up to the maximum insured amount.
Finance companies are another investment institution, and they raise money by selling
stock, bonds, and commercial paper. Commercial paper is a short-term loan with a maximum
maturity of 270 days, and a well-known bank or corporation can issue it. Commercial paper is a
form of direct finance and has no collateral. Furthermore, finance companies lend to consumers
for furniture, appliances, cars, home-improvement loans, or they lend to small businesses. Some
corporations created their own finance companies to help consumers buy their products. For
example, General Motors Acceptance Corporation (GMAC) lends money to people, so they can
buy cars from General Motors (GM). However, GM sold its 51% stake in GMAC to Cerberus
Capital Management in 2006. Then GMAC expanded into the mortgage market and was caught
in the 2008 financial storm, when the housing bubble deflated. Currently, GMAC was renamed
Ally Bank in 2010 and became part of the bank holding company, Ally Financial, Inc.
Contractual Saving
Contractual saving institutions are insurance companies and pension funds. Insurance
companies provide protection for people who buy insurance policies. Insurance policy prevents
financial hardship, such as a medical emergency, car accident, or the death of a family member.