Unit 4: Notes and Need-To-Knows 3.3.2015

Money is any asset that can be used for purchasing goods and services.
3 uses if money:

• Medium of exchange (determining value)
• Unit of Account (compare prices)
• Store of Value (where you put your money)

3 types of money:

• Commodity money: salt, olive oil, and gold. Has value within itself.
• Representative money: represents something of value. (IOU)
• Fiat money: it is money because the government says so. (Paper currency and coins.)

6 characteristics of money:

1. Durability: how long it lasts.
2. Portability: take it other places.
3. Divisabilty: how it can be broken down.
4. Uniformity: same where ever
5. Limited Supply
6. Acceptability: accepted wherever.

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

M1 MONEY:

• Liquid assets: easily converted to cash. (Coins, currency, checkable deposits or demand deposits, travelers checks

M2 MONEY:

• M1 Money + Savings account + Money Market Account.

3 Purposes of Financial Institutions:

1. Store money
2. Save money: savings account, checking account, money market account, certificate of deposit.
3. Loan money: credit cards and mortgages.

Banks keep a fraction of the funds and loan out the rest.

Interest Rates:

1. Principle: amount of money borrowed.
2. Interest: price paid for use of borrowed money
3. Simple interest: paid on the principle.
4. Compound: paid on principle + accumulated interest

SI = ( PxRxT) / 100

5 types of financial institutions:

1. Bank
2. Savings and Loan
3. Mutual Savings
4. Credit Union
5. Finance Companies

Redirecting resources: consume now for the future.
Financial Assets: claims on property, income of borrower
Financial Intermediary: institutions that channels funds to savers to borrowers

3 Purposes:

1. Share risk: diversification; spreading out investments to reduce risks.
2. Sharing Information
3. Liquidity: money an investor receives above and beyond the sum of money that was initially invested. (returns)

BONDS YOU LOAN, STOCKS YOU OWN

Bonds are loans or IOU that represents debt that the government or cooperation must repay to an investor.
3 components of a bond:

1. Coupon rate: interest rate that bond issuer will pay to bond holder.
2. Maturity: times at which payment to bond holder is due.
3. Par Value: amount that an investor pays to purchase a bond.

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