 Cash
 Check
 Debit
 house
card
 Why
does the US dollar have such a good
value?
Chapter 10
Chapter 10 Section 1
SSEMI1b Explain the role of money as a medium of exchange
and how it facilitates exchange.
 Use
of money is
a social custom
• Its role is to facilitate
exchange
 Money
itself is any
asset accepted as
payment for goods
or services
 Without money we would barter like
traditional societies
• Although barter works it can be complex and
inefficient
1.
Medium of Exchange:
commonly accepted
payment
2.
Unit of Account:
standardized and easily
measured
3.
Store of Value: holds purchasing power
over time
 What
are the 6 characteristics of money?
On the island of Yap, large circular stones
are used for money. The main reason why
this type of money serves its function as a
medium of exchange is because it is
A very portable
B highly divisible
C accepted as payment
D prized in foreign transactions
 Barter
 http://www.youtube.com/watch?v=J7hN
Ot2Y0J8
 National
Geographic – Inside America’s
Money Vault
 http://www.youtube.com/watch?v=WmV
GYLTROnQ
 Durable—lasts
for an
extended period
 Portable—easy to
carry & exchange
 Divisible—easily broken into measurable units
 Uniform—similar in appearance and has a
standard value
 Scarce—Not overly printed or in too great
abundance
 Accepted—Society is certain that it has value
 Fiat—has
value because the government
says so
• “legal tender”
 Representative—
stands in for money
• IOU, silver certificate
 Commodity—has
other uses besides
acting as money
• Tobacco, water
 Money
supply all the money
available in the economy
• This includes money in and out
of banks
• Liquidity refers to how easily
an asset can be turned into cash
• Federal Reserve tracks the
amount of money “in circulation”
or in the economy
Chapter 10 Section 3
 The
Financial System—various markets,
players and institutions that coordinate
the channeling of funds between
borrowers and savers
• Borrowers—demand money from the system
with the knowledge that they will have to pay
it back with interest
• Savers—supply money to the system with the
expectation that it will be paid back to them
with interest
 Investment
Banks—raise money for
companies (perhaps even nations) and
manage wealth of private investors
(merchant bank)
• JPMorgan, Goldman Sachs
 Credit
Unions—cooperative lending for
specific groups
• Marshland, Teachers
 Commercial
Banks—offer a wide range of
lending services to the public (retail bank)
• Bank of America, United Community
 Banks
serve several
purposes:
1. Store Money—safe
and insured
2. Vehicle for Saving—
variety of accounts
available
3. Loans—renting money at a cost
4. Credit—form of deferred payment
•
•
Principal is amount owed
Interest is cost of renting the principal
 FDIC
preserves and promotes public
confidence in the U.S. financial system by
• insuring depositors
• identifying, monitoring and addressing risks to
the deposit insurance funds
• limiting the effect on the economy and the
financial system when a bank or thrift institution
fails
Chapter 11 Section 1
“A [financial] market is an aggregation of what people think the
future is going to be like.”
~ Dan Mathisson
 When
a saver, or investor, makes a
purchase on the financial market they
gain a financial asset
• AKA securities, these are claims on a borrower’s
repayments and potential interest
 Most
investors will not meet borrowers,
they will move through an intermediary
• These are companies and institutions that offer
financial products
 Dealing
with intermediaries offers 3
advantages:
1. Sharing of risk
•
institutions can diversify, or spread, an investors
money out into multiple investments to reduce risk
Access to information
2.
•
Managers and companies provide portfolios and
prospectuses that explain companies’ profits,
losses, products, etc.
Liquidity
3.
•
Banks can offer a guaranteed return, or money
back above what was invested—something more
secure than giving money to a friend
 Investing
generally refers
to the use of resources or
assets to earn income or
profit in the future
 There are many vehicles,
or instruments, for investment such as
property, stocks or bonds, savings, etc.
• Investing happens over the short or long term
• Investors look for “return” or the ratio of money
gained to lost when searching for or evaluating
opportunities
 Stock
is a claim on part of a company’s
earnings as ownership
• They are sold in shares, or
portions (AKA equities)
 Owning
stock yields a
profit 2 ways:
1. Dividends—a portion of a company’s profits
paid to investors during the year
2. Capital gains—to sell a stock for more than the
price for which it was purchased
 Stock
is purchased on
a stock exchange
• a financial market
 An
individual opens an
account with a
brokerage firm and
can purchase stock online
an
• Those trades are executed on the “floor” of a physical
market
• NYSE is America’s oldest and largest and located on
Wall Street, NYC
 Markets
generally fluctuate constantly
throughout a year or even a day
• When stock prices steadily rise it is called a bull
market; steady fall is a bear market
 These
prices are listed on many different
indices:
• NASDAQ—favors tech
companies
• S&P 500—tracks 500
companies (more diverse)
• DJIA—30 largest American
companies (Dow)
 Another
common asset is a bond—an IOU
 Investors loan money to a corporation or
government and are repaid,
with interest, over a period
of time
• When full payment is due back
to the investor, the bond has
matured
• How much the bond would pay
if held to maturity is its yield
 These
and other
complex financial
products are traded on
financial markets
 Capital
Markets offer
lending for over a year
 Money Markets offer lending for less than
year
• Primary markets allow on the original buyer to
redeem payment
• Secondary markets allow the asset to be resold
Eric received a $2,000 bonus from his
employer. He deposited the entire amount
in a one-year certificate of deposit with a
simple interest rate of 5%. When the CD
matured, how much interest had Eric
earned?
A $10
B $20
C $50
D $100