Money

$MONEY$

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

3 uses of money:

·         As a medium of exchange- using it to determine value

·         Unit of account- used to compare prices

·         Store of value: where they put it

3 types of money:

·         Commodity money: has value within itself

-3 ex. Salt, olive oil, gold

·         Representative money: represents something of value

-IOU

·         Fiat money: money gov says has value

-Consists of paper money and coins

è Currency is money but not all money is currencyß

6 characteristics of money:

1.       Durability: lasts through being washed, etc.

2.       Portability: can be taken anywhere

3.       Divisibility: can be broken down

4.       Uniformity: money is the same no matter where you go

5.       Limited supply

6.       Acceptability: people take it

Money Supply

Money supply is the total value of financial assets available in the U.S economy.

M1 money:

involves liquid assets : easily converted to cash

-          Liquid assets include: checkable deposits (demand deposits), coins, currency, travelers checks

M2 Money

Not as liquid as M1 money: includes M1 money+ savings account+ money market account

3 purposes of financial institutions

·         Store money

·         Save money

·         Loan money

2 reasons money is loaned

1.       For credit cards

2.       Mortgages

4 ways to save

1.       Through a savings account

2.       Through a checking account

3.       Through a money market account

4.       Through a certificate of deposit (CD)

(Last 2 have higher interest rates)

Loans

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

Interest: The money charged for borrowing money

Interest rates:

-          Principal: the amount of money borrowed

-          Interest: simple and compound

o   Simple: paid on the principal

o   Compound: paid on the principal plus accumulated interest

Simple interest: I=( PxRxT)/100

-          P= principal

-          R= interest rate

-          T=time

Time = (Ix100)/ PxR

Principal= (Ix100)/ RxT

Interest rate=( Ix100)/ PxT

Financial institutions

1.       Bank

2.       Savings and loans institution

3.       Mutual savings banks

4.       Credit unions

5.       Finance companies

Investments

Investment:  is redirecting resources, 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 of financial intermediaries

-          Share risk: through diversification: spreading out investments to reduce risks

-          Provide information:  get a financial advisor

-          Liquidity: returns. The money investor receives above/ beyond the sum of money initially invested. The higher the risk the higher the return

Stocks and loans:

Bonds you loan, stocks you own

Bonds: loans or IOUs that represent debt that the government or a corporation must repay to an investor

-          Generally low risk investments

-          3 components:

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

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

-          Par Value:  the principal, the amount the investor pays to purchase a bond

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