Money    (3/3)

3 uses 

1) as a medium of exchange. Using it to determine value. 

2) unit of account. Using it to compare prices. 

3) as store of value. Where you put your money.

3 types

1) Commodity - it has value within itself

      •salt 

      •olive oil

      •gold 

2) Representative- represents something of value.

Ex) IOU 

3) Fiat- it is money because the government says so. Consists of paper currency and coins. 

Currency is money buy not all money is currency. 

6 characteristics

1) Durability- how long it lasts 

2) Portability- you can put it anywhere on your body and take it anywhere.

3) Divisibility - a dollar can be broken down

4) Uniformity- money is the same anywhere you go 

5) Limited supply 

6) Acceptability 

Money supply

The total value of financial assets available in the US economy.

M1 Money

Involves 

•liquid assets - easily converted to cash 

    - coins 

    - currency 

    - checkable deposits or demand        deposits 

    - traveler's checks 

M2 Money

Includes

• M1 money 

• savings account

• money market account 

3 purposes of financial institutions 

1) to store money

2) to save money

3) loan money  

    • for credit cards 

    • for mortgages 

4 ways to save

1) through savings account 

2) through checking account 

3) through market money account 

4) through a certificate of deposit (CD)

Loans

Banks operate on a fractional reserve system. They keep a fraction of the funds and they loan out the rest. 

Interest rates

• principal

The amount of money borrowed

• interest 

   

   - simple interest - paid on the principle 

I=P•R•T / 100

T= I•100 / P•R

P= I•100 / R•T

R= I•100 / P•T

P= Principle

I= Simple interest 

R= Interest rate 

T= Time 

   - compound interest - paid on the principle plus the accumulated interest 

Types of financial institutions 

1) commercial bank 

2) savings and loans institutions 

3) mutual savings banks 

4) credit unions 

5) finance companies 

Investment

Redirecting resources. Consume now for the future. 

Financial assets 

•claims on property and income of borrower 

Financial intermediary 

• institution that channel funds from savers to borrowers 

3 purposes 

1) to share risk 

    -Diversification - spreading out investments to reduce risk. 

2) to provide information 

3) liquidity 

    - returns 

    - the money an investor receives above and beyond the sum of money that was initially invested. 

The higher the risk, the higher the return. 

Bonds you loan

Stocks you own 

Bonds 

Are loans or IOUs that represent debt, that the government or a corporation must repay to an investor. Generally low risk investments

3 components 

1) coupon rate - the interest rate that a bond issuer will pay to a bond holder 

2) maturity - the time at which payment to a bond holder is due. 

3)  par value - the amount that an investor pays to purchase a bond. 

Yield 

The annual rate of return on a bond if the bond were held to maturity.