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
