UNIT 4: MONEY [3/3]

money is any asset that can be used to purchase any goods or service.

uses of money

• medium of exchange: use to determine value. trade & barter
• unit of account: how do you compare prices?
• store of value: how money can be stored? savings account

types of money:

• commodity money: has value within itself. EX. gold, salt, etc.
• representative money: represents something of value. EX. IOU
• fiat money: money because the gov. says so. EX. paper money and coins. 

characteristics of money:

1. durability: it will last. EX. washes. 
2. portability: easily transported
3. divisibility: easily divided. $1 = 4 quarters
4. uniformily
5. limited supply
6. acceptability: taken anywhere

money supply: total value of financial assets available in US economy.
M1 money:
liquid assets: easily to convert to cash
EX. cash, paper currency, coins, checkable/demand deposits, &traveler's check.

M2 money:
M1 money + savings account + money markets account
not spent immediately

purpose of financial institutions:

1.  store money
2. save money
3. loan money: 1st credit card ; mortage

save money:

1. savings account
2. checkable account
3. money market account
4. certificate of deposit (CO)

money market and CO have higher interest

loans:
banks operate on a fractional reserve options where they keep a fraction of funds and loan out the rest.

interest rate:
principal - amount of money borrowed
interest - price paid for use of borrowed money
simple interest - paid on principal
compound interest - paid on principal and accumulated interest.

types of financial institutions:

1. commercial banks
2. mutual saving bank
3. finance companies
4. saving and loan institution
5. credit union

investments: redirect resources you would consume for the future.

financial assets: claims on property or income of borrower
financial intermediaries: institutions that channels funds from savers to borrowers.

savers --> financial institution --> investors

purpose of financial intermediaries:

1. sharing risk: diversification - spreading out investments to reduce risk. 
2. providing information
3. liquidity returns - amount investors receive above and beyond the sum of money invested. 

bonds you loan ; stocks you own

bonds - loans or IOUs that rep. debt that gov. or corporations must pay to an investor. low risk investment.

coupon rate - interest rate the issuer pays the bond holder.
maturity - time which payment to bond holder is due.
par value - amount an investor pays to purchase an bond and that would be paid to investor at maturity.
yield - annual rate of returns on a bond if bond is held to maturity.

time value of money - is dollar today worth more than a dollar tomorrow?
yes, because inflation and opportunity cost.
reason for charging and paying interest.

cal value of money:
 future value - v
p - present value
r - real interest rate (nominal rate - inflation rate)
n - years
k - number of times interest is credited per year.