Unit 4 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 is used to compare prices
- Store of value (where some people hide their money)

3 types of money

- Commodity money (has value within its self)
- Representative money (represents something of value)
- Fiat money (money because Government says so)

 

6 characteristics of money

- Durability
- Portability
- Divisible
- Uniformity
- Limited Supply
- Acceptability

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

M1 Money:

Involves Liquid Assets (easily converted to cash)
- coins
- checks
- currency
- travel checks

M2 Money:

It is not as liquid as M1
- savings account
- Money market account
3 purposes of financial institutions
- Store money
- Saved money
- Loan money
 

Two reasons why they loan money

- Credit cards
- Mortgages

Four ways to save

- Savings account
- Checking account
- Money market account
- Certificate of deposit


Loans: Banks operate on a fractional reserve system which means they keep a fraction of the funds and loan out the rest.
Interest rates
- Principle is amount of money borrowed
- Interest is the price paid for use of borrowed money
   ■ Simple Interest is paid on the principle
   ■ Compound interest is paid on the principle plus accumulated interest

Formula for simple interest:

I equals P times R times T over 100
T equals I times 100 over P times R
P equals I times 100 over R times T
R equals I times 100 over P times T

 

Types of financial institutions

- Commercial bank
- Savings and loans institutions
- Mutual savings bank
- Credit unions
- Finance Companies

 

Investment:

Redirecting resources. Consume now for the future.
Financial Assests: are claims on property and income of borrower
Financial Intermediaries: institutions that channel funds from savers to borrowers. 3 purposes of financial intermediaries
- Share risks. Through diversification. Where spreading out investment to reduce risk.
- Provide information
- Liquidity (Returns) money investors above and beyond the sum of money that was initially invested

Bonds are loans that represent debt that the government or a corporation must repay to a investor. Generally low risk.

3 components of a bond

- Coupon rate is the interest rate that a bond insurer will pay to a bond holder
- Maturity is the time in which payment to a bond holder is due
- Par value (principle) amount that an investor pays
- Yield is the annual rate of return on a bond if the bond were held to maturity