Unit 4

Definition: Money is any assets that can be used to purchase any goods or services.

There are three uses of money:

1. As a medium of exchange - determine value
2. Unit of account - to compare prices
3. Store of value - where you put your money

The three types of money are: 

1. Commodity Money - is money that has value within itself.   ex: salt, olive oil, gold 
2. Representative Money - is money that represents something of value   ex: an IOU
3.  Fiat Money - it is money because the government says so and it consists of paper currency and coins.

Six characteristics of money:

1. Durability - how long it lasts
2. Portability - you can take it anywhere or put it anywhere
3. Divisibility - can be broken down
4. Uniformity - it is the same no matter where you go
5. Limited supply
6. Acceptability - people will take it

* Money supply is the total value of financial assets available in the U.S economy*

-M1 Money involves liquid assets (easy to to convert to cash), checkable or demand deposits, and travelers checks.

-M2 Money involves M1 Money + Savings Act + Money Market account. 

Three purposes of Financial Institutions:

• Store Money 
• Save Money 
• Loan Money 

Two reasons they loan out money is for credit cards and for mortgages.

There are 4 ways to save money:

1. Through a savings account with an interest of 0.5 - 2%
2. Checking account with no interest
3. Money market account
4. Certificate of deposit which can't move money without being penalized. 

Loans - banks operate on a fractional reserve system which means they keep a fraction in the bank and lend out the rest.  

*Interest rates*
Principle is the amount of money that has been borrowed

Actual interest is a price paid for use of borrowed money.

Simple interest that are paid on the principle

Compound interest which is money paid on the principle plus accumulated interest. 

Simple Interest: I= P*R*T              P= Principal   R= Interest Rate   T= Time
                                    100
 R= I * 100           P= I*100        T= I*100
         P*T                     R*T               P*R

There are 5 types of financial institutions:

1. Commercial banks
2. Savings and loan institutions
3. Mutual savings bank
4. Credit unions
5. Finance companies. 

Investment is redirecting resources (consume now for the future).  
Financial Assets - claims on property and income of borrower 
Financial Intermediaries - institution that channels funds from savers to borrowers .

Three purposes if financial intermediaries are:

1. That they share risks like in diversification which spreading investments to reduce risk.
2. Intermediaries also provide information
3. Liquidity that returns money to an investor receives above and beyond the sum of money that initially was invested. 

Bonds you loan; Stocks you own
Bonds: are loans or IOU's that represent debt that the government or the corporation must repay to an investor. Low risk investment.

Three components:  Coupon Rate is an interest rate that an issuer will pay to bondholder. Maturity is time in which a payment bond holder is due. Par Value is the amount that an investor pays to purchase a bond
*Yield is the annual rate of return on a bond if the bond were held to maturity.*

Time value of Money: Why is a dollar today worth more than tomorrow?

-opportunity cost and inflation

-this is the reason for charging and paying

Interests:
Let v= future value of money.

 P= present value of money.

R= real interest rate (nominal interest rate - inflation rate) expressed as a decimal

 N= years.

 K= number of times interest is credited per year. 

Formulas:
Simple interest formula: v=(1+r/k)^n *p
The compound formula: v=(1+r/k)^nk +p 
 1) Calculate interest rate: r% = 1% - pi% 
2) Simple interest formula: v= (1+r)^n *p 

Monetary equation of exchange:

MV = PQ

M=money supply   V=velocity of money   P=price level   Q=quantity