Unit 4: (3/3/2015)

     Money is any asset that can be used to purchase any goods or services.

3 uses of money
1. The medium of exchange: used to determine value.
2. Unit of account: how do you compare prices.
3. store of value: how money can be stored.

3 types of money
1. commodity money - has value within itself.
EX: salt, gold, and olive oil
2. representative money - represent something of value
EX: I.O.U.
3. Fiat money - it is money because the government says so.
EX: paper currency and coins,




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

M1 money
-Liquid assets - easily to convert to cash

M2 money 
-M1 money plus
      *savings account
      *money market account

3 purposes of financial institutions.
1. store money
2. save money
3. loan money

4 ways to save money
1. savings account
2. checking account
3. money market accounts
4. certificate of deposit

Loans  -  Banks operate on a fractional reserve system. which is where they keep a fraction of the funds and loan out the rest.

Interests rates
- Principle - amount of money borrowed
- Interest - price paid for the use of borrowed money
     > simple interest - paid on the principle
     > compound interest - paid on the principle plus accumulative interest.













And Finance companies are part of the financial institution.

Investment - redirecting resources you would consume now for the future.

Financial assets - claims on property or income of borrower

Financial intermediaries - institution that channels funds from savors to borrowers

Savers ----> financial institution ----> investors.

Purposes of financial intermediaries
1. sharing risks
    diversification - spread out investment in order to reduce risk
2. providing information
3. liquidity
    returns - amount an investor receives above and beyond the sum of initially invested.

Bonds and stocks
Bonds you loan; stocks you own
Bonds - I.O.U.'s or loans that represent that the government/corporation must repay to an investor
   3 components
1. coupon rate: interest rate the issuer pays ti the bond holder
2. maturity: time at which payment to a bond holder is due.
3. par value: amount an investor pays to purchase a bond and that will be repaid to an investor at maturity.

Yield - annual rate of return on a bond if the bond were held at maturity.