Economics: Money, Banking and Finance

Economics:Money, Banking and Finance Unit 4

Money • Three Uses: • Medium of Exchange • Barter Economy vs. Monetary Economy • Unit of Account • Store of Value • Six Characteristics of Currency • Durability • Portability • Divisibility • Uniformity • Acceptability • Limited Supply

Sources of Money • Commodity Money • Representative Money • Fiat Money • Crypto-currency?

Banking • 2 Types • Private Banks • National Banks • Monetary Supply • Liquidity • M1 • M2 • Functions • Store Money • Save Money • Savings Accounts • Checking Accounts • Debit Cards • Money Market Accounts • CDs (Certificates of Deposit) • Make Loans • Mortgages • Credit Cards

How Banks Make a Profit Money leaves bank Money enters bank Interest and withdrawals to customers Deposits from customers Money loaned to borrowers: • business loans • home mortgages • personal loans BANK Interest from borrowers Fees for services Bank’s cost of doing business: • salaries • taxes • other costs Bank retains required reserves Fractional Asset Banking

Loans • Principal • Interest • Compound Interest • Default • Foreclosure

Investing • Goals • Keeping up with inflation • Saving for retirement • Profits • Financial Assets • Bank Accounts • Pension • Bonds • Real Estate • Stocks • Risk • Risk vs. Return • Diversification • FDIC • Portfolios • Prospectus

Financial Intermediaries Savers make deposits to… Financial Institutions that make loans to… Investors Commercial banks Savings & loan associations Savings banks Mutual savings banks Credit unions Life insurance companies Mutual funds Pension funds Finance companies Intermediaries

Discounts from Par 1. Sharon buys a bond with a par value of $1,000 at 5 percent interest. = Bond purchase without discount from par 2. Interest rates go up to 6 percent. 3. Sharon needs to sell her bond. Nate wants to buy it, but is unwilling to buy a bond at 5 percent interest when the current rate is 6 percent. 4. Sharon offers to discount the bond, taking $40 off the price and selling it for $960. 5. Nate accepts the offer. He now owns a $1,000 bond paying 5 percent interest, which he purchased at a discount from par. = Bond purchase with discount from par Bonds • Three Components • Coupon Rate • Maturity • Par Value

Bond Ratings • Standard & Poor’s / Moody’s / Finch’s • AAA • AA+/- • A +/- • BBB +/- • BB +/- • B +/- • CCC +/- • CC +/- • C +/- • D • Bond Benefits • Low Risk • Bond Risks • Default • Fixed Rates • No control

Types of Bonds • Savings Bonds • Treasury Bonds (T-Bills) • Municipal Bonds (Munis) • Corporate Bonds • Junk Bonds

Financial Markets • How Long? • Capital Markets • Money Markets • Who’s Selling? • Primary Markets • Secondary Markets

Stock Market • Shares • Equities • Profit • Quarterly Dividends (Income Stock) • Capital Gains (Growth Stock) • Types of Shares • Common Stock (Voting) • Preferred Stock (Non-Voting) • Stock Splits

Trading Stocks • Brokerage Firms • Stockbroker • Stock Exchanges • Stock Traders • The NYSE • The Dow • The S&P 500 • OTC Market • Nasdaq • Daytrading

Financial Instruments • Futures • Options • Call option • Put option • Shorting • Market Environment • Bull Market • Bear Market

Illegal Trading • Stock Manipulation • Pump and Dump • Short and Distort • Insider Trading • Dummy Corporations • Boiler Rooms • Ponzi Schemes • The SEC

Economics: Money, Banking and Finance