Unit 4 money notes

Unit 4

Money: any asset that can be used to purchase goods and services

3 uses:

                As a medium of exchange: add value to item

                Unit of account: used to compare prices

                Store of value: where we store money, ex. Shoebox, and bank

3 types

                Commodity money: has value within itself, ex. Salt, and olive oil, gold

                Representative money: represents something of value, ex. IOU

                Fiat money: money because government said so, ex. Consists of paper money and coins

6 characteristics of money

                Durability: how long it last

                Portability: take it anywhere by carrying it anywhere on your body

                Divisibility: can be broken down like dollar to quarters

                Uniformity: money is the same no matter where you go

                Limited supply: not a lot circulating

                Acceptability: people will accept is as payment

Money Supply: total value of financial assets available in the US economy

                M1 money: involves liquid assets, means easy to convert to cash

                                Liquid assets: coins, paper currency, checkable deposits or demand deposits (checks), traveler’s checks  

                M2 money: M1 money + savings account + money market account

3 purposes of financial institutions

                Store money

                Save money

                Loan money: 2 reasons

                                Credit cards

                                Mortgages

4 ways to save

                Savings acct. barely any interest from .05 to 2%

                Checking acct. only certain types of acct.

                Money market acct. give higher interest rate 2 to 6%

                Certificate of Deposit (CD) give higher interest rate 2 to 6%

Loans: banks operate on a fractional reserve system which means they keep a fraction of the funds and they loan out the rest

Interest rates:

                Principal: amount of money borrowed

                Actual interest: price paid for use of borrowed money

                                Simple interest: paid on the principal Simple interest = PRT/ 100

                                                P=principal = I (100)/ RT

                                                R= interest Rate = I (100)/ PT

                                                T= Time = I (100) / PR

                                Compound interest: paid on the principal plus the accumulated interest

5 types of financial institutions

                Commercial Bank

                Savings and Loans institutions

                Mutual Savings banks

                Credit Unions

                Finance Companies

Investment: redirecting resources you would consume now for the future

Financial Assets: claims on property, and income of borrower

Financial intermediaries: institutions that channel funds from savers to borrowers

                3 purposes

                                To share risks: diversification (where we spread out investments to reduce risks)

                                To provide information: need to be advised on how things run to invest

                                Liquidity: returns, this is the money an investor receives above and beyond the sum that was initially invested.

Bonds you loan

Stocks you own

Bonds: loans or IOU that represent debt that the government or a corporation must repay to an investor, generally low risk investment

                3 components

                Coupon rate: interest rate that a bond issuer will pay to a bond holder 

                Maturity: the time at which payment to a bond holder is due

                Par value: principal, amount that an investor pays to purchase a bond

Yield: annual rate of return on a bond if the bond were held to maturity