general finance & banking
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T O G E T H E RT A L E N T E D
Unissons nos Talents
T O G E T H E RT A L E N T E D
General Finance &Banking
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Financial System
Financial System
FinancialInstitution
FinancialMarkets
FinancialInstruments
FinancialServices
Financial System transfers funds from savers to consumers
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Financial System-Functions
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Financial Markets
Financial Markets
Capital Markets Money Markets
Organized Unorganized
Primary Market Secondary Market
Price discovery process - when buyers and sellers trade the assets, they
determine price at which financial assets can be sold or bought atProvision of liquidity by providing a mechanism for investors to sell
financial assets
Low cost of transaction and information, as buyers / sellers are able to
access each other on a collective basis and therefore individual
efforts of finding a buyer / seller need not be made
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Capital Markets Overview
Markets A place where exchange of goods and services happen
Money markets are financial markets where only short-term debt instruments(maturity of less than one year) are traded. Money markets are mainly wholesalemarkets (large transactions) where firms and financial institutions manage theirshort-term liquidity needs (i.e. to earn interest on their temporary surplus funds).
Capital Market Capital markets are markets in which long-term securities aretraded. These long-term instruments include equity instruments (infinite life),government bonds and corporate bonds (original maturity of one year or greater).Capital markets securities are often held by financial intermediaries, such as mutualfunds, pension funds and insurance companies.
Place where capital (fund) requirements of the issuers are met; i.e. Issuers(Corporate, Government, etc) raise funds
Trades in these markets are for debt, equity securities or other instruments
Organized, as they are governed by regulatory bodies [Securities &
Exchange Board of India, RBI]
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Primary Market
Sell (float) new stocks and bonds to the public for the first time. In the
primary market the security is purchased directly from the issuer. A primary
market is a financial market in which new issues of financial securities (both
bonds and stocks) are sold to initial buyers.
Secondary Market
Secondary market is where investors trade among themselves. An
investor purchases a security from another investor rather than the
issuer. Auction market forms a part of this market. A secondary
market is one in which securities that have been previously issued
can be resold.
Primary markets facilitate new financing to corporations, but most of
the trading takes place in the secondary markets.
Primary and Secondary Capital Markets
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Financial Markets
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Terms.
CB (Commercial Bills): A document expressing the commitment of aborrowing firm to repay a short-term debt at a fixed date in the future.
Repo Rate: Instrument of Money market, rate at which bank borrows moneyfrom central bank
CD (Certificate of Deposits): Time Deposits, certificate issued by bank thatindicates sum of money is deposited. Bears a maturity date, interest rate,duration can be max of 5 years.
CP (Commercial papers): Short term promissory notes either unsecured orbacked by assets such as loan or mortgages issued by corporation.
ICD (Investment corporation of Dubai): Special instruments bi investmentbanking of Dubai to generate investment returns and support Dubai.
Treasury Bills: Treasury Billsare money market instruments to finance theshort term requirements of the Government.
ALM :ALM is a comprehensive and dynamic framework for measuring,monitoring and managing the market risk of a bank.
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Financial Institutions
Financial Institutions
Regulatory Intermediaries Non-Intermediaries Others
Banking Non-banking
Non Banking Intermediaries
Insurance Cos.
Pension Funds
Credit Unions
Non Intermediaries
Asian Development Bank
World bank
Banks as Intermediaries
ABN AMRO, CITI Bank, State Bank of India
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1.Money market is a place where banks deal in short term loans in the form ofcommercial bills and treasury bills. But capital market is a place where
brokers deal in long term debt and equity capital in the form of debenture,shares and public deposits.
2.In money market maturity date of repayment may after one hour to 90 days.But in capital market, loans are given for 5 to 20 years and if issue of sharesby co. , its amount will repay at winding of company . But investors have rightto sell it to other investors if they need the money.
3.Rate of interest in money market is controlled by RBI or central bank of anycountry. But capital markets interest and dividend rate depends on demandand supply of securities and stock markets sensex conditions. Stock marketregulator is in the hand of SEBI.
4.Main dealer of money market s are commercial banks like SBI, ICICI Bank,UTI and LIC and other financial institutions. Main dealers are all the public andprivate ltd. Co. and more than 30 million investors. It is increasing trend due toopening of online capital market.
5.In USA, money marketis famous with dealing of money fund and bankersacceptance instruments. But capital market in USA is famous with New Yorkstock exchange and stock regulator is Security exchange commission (SEC)
http://www.svtuition.org/2009/12/what-is-dividend.htmlhttp://www.svtuition.org/2009/12/what-is-dividend.html -
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Share & Bond
Bonds, debentures, government securities: These are all debt instruments.You are loaning your money to the entity issuing the security. It could be a
corporation, a government entity, etc.
Shares: You own a portion of the company, thus another word for a stock isequity. You get to share in the success or failure of the company.
Deposits are like any bank deposit. Interest is paid in various ways on thedeposits.
difference between debenture and bond: according to companies act 1956India Debenture includes stocks, bond and any other securities of company. private sector companies issue debentures and public sector and financial
institutions issue bonds . Bond is a long term debt instrument that promises to pay a fixed annual interest over
a specific period. debentures may be convertible into equity shares while bonds are not. debentures may be redeemed in installment
To issue a share / bond / debenture, the company must be registered andmust have the necessary minimum capital. Prior approval from the existingshare holders, Company Law Board, SEBI, RBI etc is necessary
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Which is better investment? it totally depends on where you are in life andwhat your tolerance for risk is.
Id rather own something for a period of years in hope for growth, then lendsomebody $20 and know Im getting $25 back in 5 years. Thus, I wouldprobably consider myself more of a stock investor.
However, the bondholder may very well feel safer and more secure with
his/her investment choice. The ideal long-term portfolio would probablyhave a little bit of each.
Equity Market: In Equity market we buy shares instead of certificates. Theseshares makes us a proportionate owner of the company of which we buyshares. Here also we lend money to the companies but like a owner. Ifcompanies makes profit we gain interest and if the companies makes loss
we loose money.
In short you can say in DEBT MARKET investment is very safe but giveslow but fixed returns. In EQUITY MARKET investment is linked with a riskbut when market if good given a much better returns than DEBT schemes.
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Debt Market: If a person invests in Debt funds it means he is eitherinvesting in Company bonds, Fixed Deposits, Debt linked mutual funds,bank bonds, municipal bonds, central/state government securities etc.As the name suggest companies/Institutions line central government,state government, Private/Public sector companies, banks etc needsfunds to run their daily business. They issue securities/certificatesagainst which we lend them money against a chargeable interest.
Mainly in Debt market we lend money in the form of DEBT. The interestpromised by companies, banks, government here is secured.
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Some Story.
The name bankderives from the Italian word banco"desk/bench", usedduring the Renaissance by Florentine bankers, who used to make theirtransactions above a desk covered by a green tablecloth. However,traces of banking activity can be found even in ancient times.
In fact, the word traces its origins back to the Ancient Roman Empire,where moneylenders would set up their stalls in the middle of enclosed
courtyards called macellaon a long bench called a bancu, from whichthe words bancoand bankare derived. As a moneychanger, themerchant at the bancudid not so much invest money as merely convertthe foreign currency into the only legal tender in Rome- that of theImperial Mint
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Why do Banks exist?
To Provide Financial products and Services
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What is a Bank?
A bank is a business.
Banks sell services - financial services such as car loans, home mortgageloans, business loans, checking accounts, savings accounts, certificatesof deposit, and credit card services.
Some people go to the bank in search of a safe place to keep their money.
Others go to the bank seeking money for loans to buy houses or cars, startbusinesses, expand farms, or do any of the other things that requireborrowing money.
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More Facts
Where do banks get the money to lend?
They get it from all the people who open savings and other typesof accounts. Banks act as a go between the people who saveand people who need to borrow.
If savers didn't put their money in banks, the banks would havelittle or no money to lend.
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More Facts
Your savings are combined with everyone else's savings to form abig pool of money.
The bank uses that pool of money to make loans. The money doesn'tbelong to the bank's president, board of directors, or stockholders.It belongs to the depositors.
That's why banks have a special obligation not to take big risks whenthey make loans.
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Banking as a Whole
Clients
Includes Auto Finance,
Consumer Banking, Home
Finance, Insurance and Small
Business Banking
Provides mutual fund, insurance
& home finance and workplace
banking products to consumers
and small businesses
One of the worlds leadinginvestment banks
Services provided: Advice on
corporate strategy and structure,
raising and placing capital, making
markets in financial instruments and
offering sophisticated risk
management services
Provides investment & wealth management
services to institutional investors, high net
worth individuals & retail customers
Provides personalized advice and solutions to
wealthy individuals
Global leader in transaction
processing and information
services to wholesale clients
Three Businesses: Institutional
Trust Services, Investor
Services(WSS) and Treasury
Services
Major provider of financial services
including corporate finance, cash
management, & credit
Comprises of five national business
segments: Middle Market Banking,
Mid-Corporate Banking, Commercial
Real Estate, Asset Based Lending
and Commercial Leasing
Delivers credit card and other related
payment products to cardholders and
merchant outlets
Aims to be the preferred payment card in
existing customers wallets and to increase
access to new customers
InvestmentBank
Treasury andSecurities
Services
CardServices
Assetand
wealthManagement
Retail
FinancialServices
CommercialBanking
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A Bank is?
A bank is defined as a commercial institution licensed as a receiver ofdeposits and giver of loans both short and long term.
An organization, usually a corporation, chartered by a state or federalgovernment,which does most or all of the following: receives demand deposits and timedeposits, honorsinstruments drawn on them, and paysinterest on them;discounts notes, makes loans, and invests in securities; collects checks, drafts,and notes; certifies depositor's checks; and issues drafts and cashier's checks.
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Terms
An unsecured, short-term debt instrument issued by a corporation, typicallyfor the financing of accounts receivable, inventories and meeting short-termliabilities. Maturities on commercial paper rarely range any longer than 270days. The debt is usually issued at a discount, reflecting prevailing marketinterest rates. A major benefit of commercial paper is that it does not need to be registered with
the Securities and Exchange Commission (SEC) as long as it matures before ninemonths (270 days), making it a very cost-effective means of financing. Theproceeds from this type of financing can only be used on current assets
(inventories) and are not allowed to be used on fixed assets,
The working capital requirement of business firms is provided by banksthrough cash-credits / overdraft and purchase/discounting of commercialbills. Commercial bill is a short term, negotiable, and self-liquidatinginstrument with low risk. It enhances he liability to make payment in a fixeddate when goods are bought on credit.
Treasury Bills: A short-term debt obligation backed by the U.S. governmentwith a maturity of less than one year. The purchase price is less than theface value. At maturity the government pays the Treasury Bill holder the fullface value. The Treasury Bills are marketable, affordable and risk free. Thesecurity attached to the treasury bills comes at the cost of very low returns.
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Money Market instruments
Certificate of Deposit: The certificates of deposit are basically time deposits that are issued by thecommercial banks with maturity periods ranging from 3 months to five years. The return on thecertificate of deposit is higher than the Treasury Bills because it assumes a higher level of risk.
Commercial Paper: Commercial Paper is short-term loan that is issued by a corporation use forfinancing accounts receivable and inventories. Commercial Papers have higher denominations ascompared to the Treasury Bills and the Certificate of Deposit. The maturity period of CommercialPapers are a maximum of 9 months. They are very safe since the financial situation of the corporationcan be anticipated over a few months
Banker's Acceptance: It is a short-term credit investment. It is guaranteed by a bank to makepayments. The Banker's Acceptance is traded in the Secondary market. The banker's acceptance ismostly used to finance exports, imports and other transactions in goods. The banker's acceptanceneed not be held till the maturity date but the holder has the option to sell it off in the secondarymarket whenever he finds it suitable.
Euro Dollars: The Eurodollars are basically dollar- denominated deposits that are held in banksoutside the United States. Since the Eurodollar market is free from any stringent regulations, thebanks can operate at narrower margins as compared to the banks in U.S. The Eurodollars are tradedat very high denominations and mature before six months. The Eurodollar market is within the reachof large institutions only and individual investors can access it only through money market funds.
Repos: The Repo or the repurchase agreement is used by the government security holder when hesells the security to a lender and promises to repurchase from him overnight. Hence the Repos haveterms raging from 1 night to 30 days. They are very safe due government backing.
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Who is a Banker?
Halsburys Laws of England defines a banker as
An individual, partnership or corporation whose sole predominatingbusiness is banking, that is the receipt of money on current account ordeposit account and the payment of cheques drawn by and thecollection of cheques paid in by a customer.
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Meaning of Customer
In General Western Railway C. vs. London and County Banking Co. Ltd., itwas stated,
A customer is a person who has some sort of account, either deposit orcurrent or some similar relation with a bank and from this it follows thatany person may become a customer by opening a deposit or currentaccount or having some similar relation with a bank.
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Role of Banks
Intermediary role between lenders and borrowers
Lenders Deposits funds with Banks
Liability products (Liability for Banks)
Borrowers Borrows funds from Banks
Asset Products (Assets for Banks)
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Different types of Banks
Types of Banks
Central Bank (RBI)
Non BankingFinance Companies
(NBFCs)Commercial Banks
Term FinancialInstitutions
State FinanceCorporations
(SFCs)
IndianFinancial
Institutions
E.g.
IFCI
NABARD
SIDBI
PublicSector
PrivateSector
Foreign Co-operative
Banks
RegionalRuralBanksE.g.
SBI
PNB
BOB
E.g.
HDFC Bank
UTI Bank
ICICI Bank
E.g.
Citibank
ABN Amro
HSBC
State/Central PrivatePrimary Credit
Societies
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Banking Types
Retail Banking
Wholesale Banking
Retail banking refers to banking in which banking institutions executetransactions directly with consumers, rather than corporations or other banks.
Services offered include: savings and checking accounts, mortgages, personalloans, debit cards, credit cards, and so forth.
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Wholesale Banking
Wholesale banking is the provision of services by banks to the likes oflarge corporate clients, mid-sized companies, real estate developersand investors, international trade finance businesses, institutionalcustomers (such as pension funds and government entities/agencies),and services offered to other banks or other financial institutions. Inessence, wholesale banking services usually involve high valuetransactions.
(Wholesale finance means financial services, which are conducted between financial services companies andinstitutions such as banks, insurers, fund managers, and stockbrokers.)
Wholesale banking contrasts with retail banking, which is the provision ofbanking services to individuals
Wholesale Banking Products
Term Loans / Working Capital Finance Bills Discounting Guarantees Letter of Credit
St t f B k
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Structure of Banks
Front Office Middle Office Back Office
Customer
Relationships
Trading
Reports
Mark to Market
Valuations
Risk Management
Settlements
Payments
Reconciliations
Confirmations
B ki & Fi i l M k t
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Banking & Financial Markets
InstitutionalDelivery
ACH
SWIFT
CENTRALBANK
REPORTING
RATE FEEDS
Customer Delivery Channels
Internet Teller ATM Phone Mobile POS
SECURITY
Current &Savings Acct
Deposits Loans Loan AppProcessing
LoanSyndication
Bills &Collections
Letters ofCredit
ForeignExchange
Money Market Dealer InvestorServices
Cash & Liq
Management
AssetManagement
Derivatives Securities
SignatureVerification
Funds Transfer StandingInstructions
Elect MsgSystem
WorkflowManagement
NostroReconciliation
Fixed AssetsManagement
ExpenseProcessing
Risk Management Clearing
Management Information System & Regulatory Framework (Basel II) & SOXA
Customer Information System
General Ledger
3rd PartyInterface
Internet
Banking Suite
PORTAL
RETAIL
CORPORATE
INVESTORSERVICES
3rd PartyInterfaces
CRM Systems
Dealing Systems
Other Systems
Information Center
AnalyticalCRM
CapacityManagement
ProductProfitability
CustomerProfitability
ALM Credit Risk
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Banking Activities
Banking is defined as accepting deposits for the purpose of lending and
investment.
Dimensions of Banking
Deposits Loans Services
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Banking and Banking operations
Bank is a commercial institution licensed as a receiver of deposits. Banks are mainly concernedwith making and receiving payments as well as supplying short-term loans to individuals.
Exists to help you make the most of your money
Assist you with your monetary requirements and promote savings
How do they do it ??
By offering different products and ServicesBanking Services
Deposits Loans Services Capital Market
Short Term Long Term Retail Institutional
Fund based activities, greater market risk
Fee based activities, lesser market risk
E.g.
Savings
Current
Fixed E.g.
Overdraft
E.g.
Auto Loan
Home Loan
E.g.
DDs
Lockers
Bill Pay
E.g.
Bank
GuaranteeTrade
Finance
E.g.
DP
Custodian
MerchantBanking
Debenture
Trustees
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Accepting deposits from Public
Lending money to public
Remittances/Collection Business
Keeping valuables in safe custody
Government business
Acting as trustee
Treasury services
Capital Market activity
Activities of a Bank
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Lets Discuss
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How to be Happy
Three essentials for happiness:
1. Something to do,
2. Someone to love,
3. Something to hope for.
Thank You ALL & be Happy
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Repo Rate
A repo or Repurchase Agreement is an instrument of money market. Usuallyreserve bank (RBI) and commercial banks involve in repo transactions but not
restricted to these two. Individuals, banks, financial institutes can alsoparticipate in repurchase.
Repo is a collateralized lending i.e. the banks which borrow money from Reserve Bankto meet short term needs have to sell securities, usually bonds to Reserve Bank withan agreement to repurchase the same at a predetermined rate and date.
The party who originally buys the securities effectively acts as a lender (RBI).
The original seller is effectively acting as a borrower, using their security ascollateral for a secured cash loan at a fixed rate of interest (BANK).
Borrower of funds is called as seller of repo and lender of funds is called asbuyer of repo. When the term of the loan is for one day it is known as anovernight repo and if it is for more than one day it is called a Term Repo .
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Reverse Repo
CRR (Cash Reserve Ratio): Cash reserve Ratio (CRR) is the amount of Cash (liquid cashlike gold) that the banks have to keep with RBI. This Ratio is basically to secure solvencyof the bank and to drain out the excessive money from the banks. If RBI decides toincrease the percent of this, the available amount with the banks comes down and if RBI
reduce the CRR then available amount with Banks increased and they are able to lendmore.
Repo Rate: Repo rate is the rate at which our banks borrow rupees from RBI. This facilityis for short term measure and to fill gaps between demand and supply of money in a bank.when a bank is short of funds they borrow from bank at repo rate and if bank has asurplus fund then the deposit the funds with RBI and earn at Reverse repo rate.
Reverse Repo rate is the rate which is paid by RBI to banks on Deposit of funds with
RBI.A reduction in the repo rate will help banks to get money at a cheaper rate. When therepo rate increases borrowing from RBI becomes more expensive. To borrow from RBI,bank have to submit liquid bonds /Govt Bonds as collateral security ,so this facility is ashort term gap filling facility and bank does not use this facility to Lend more to theircustomers. present rate is 3.25 as on 29.01.2010)
SLR (Statutory Liquidity Ratio) is the amount a commercial bank needs to maintain in theform of cash, or gold or govt. approved securities (Bonds) before providing credit to itscustomers. SLR rate is determined and maintained by the RBI (Reserve Bank of India) in
order to control the expansion of bank credit. Generally this mandatory ration is compliedby investing in Govt bonds. present rate of SLR is 24 %.(as on 29.01.2010)But Banksaverage is 27.5 %, the reason behind it is that in deficit Budgeting ,Govt lending is moreso they borrow money from banks by selling their bonds to banks. so banks haveinvested more than required percentage and use these excess bonds as collateralsecurity (over and above SLR) to avail short term Funds from the RBI at Repo rate.
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Inflation: Cause
Inflation is caused by a combination of four factors; those factors are:
The supply of money goes up. The supply of goods goes down. Demand for money goes down. Demand for goods goes up.
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Money A view
MONEY IS WEALTH..
The key thing to remember is that wealth is not money.
money is only one of many forms of wealth, it has plenty of substitutes. The interaction between money and its substitutes explain why the demand for
money changes.
People hold money because money has purchasing power and thepurchasing power of money is determined by the supply of, anddemand for, money.
If a rise in the money supply is accompanied by an equal rise in moneydemand, overall prices and the purchasing power of money remainunchanged. Tooooo optimistic a view..
DEMAND FOR MONEY IS INFINITE
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Demand for Money
The demand for money is the desired holding of financial assets in theform of money: that is, cash or bank deposits.
The demand for money is a result of the form in which a person's wealthshould be held
motivations for holding one's wealth in the form of money:
Transaction motive Asset Motive
Two Advantages of Holding Money
the liquidity advantage (carry out transactions) of holding money and the interest advantage of holding other assets
Demand for money is defined as the nominal amount of moneydemanded divided by the price level
d i
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Money Demand Function
A typical money-demand functionmay be written as
where Mdis the nominal amount of money demanded,
Pis the price level,
Ris the nominal interest rate, Yis real output, and
L(R,Y) is the liquidity preference function.
Quantity Theory: The most basic "classical" transaction motive can be illustratedwith reference to the Quantity Theory of Money.
According to the equation of exchange MV= PY, where M is the stock of money, V is its velocity (how many times a unit of money turns over during a period of time), P is the price level and Y is real income. Consequently PY is nominal income or in other
words the number of transactions carried out in an economy during a period of time.Rearranging the above identity and giving it a behavioral interpretation as a demand formoney we have
Hence in this simple formulation demand for money is a function of prices andincome, as long as its velocity is constant.
M D d F ti
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Money Demand Function
while workers may get paid only once a month they generally will wishto make purchases, and hence need money, over the course of theentire month. an economic model that is based on such considerationsis the Baumol-Tobin model. In this model an individual receives herincome periodically, for example, only once per month, but wishes tomake purchases continuously.
Micro foundations for money demand
Asset motive: The asset motive treats money, focuses on the potential return on variousassets (including money) as an additional motivation
Speculative motive Portfolio motive: hold the wealth in a form of a low risk/low return asset (here, money) or
high risk/high return asset (bonds or equity).
where t is the cost of a trip to the bank, R is the nominal interest rate and P and Y are as before.
hi h h h d d f
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Factors which can change the demand for money
Interest Rates: Two important stores of wealth are bonds and money, these are substitute to oneself. afall in interest rates cause the demand for money to rise.
Consumer Spending: if the demand for consumer spending increases, so will the demand formoney.
Precautionary Motives: If people think that they will suddenly need to buy things in the immediatefuture (say it's 1999 and they're worried about Y2K), they will sell bonds and stocks and hold onto money, so
the demand for money will go up
Transaction Costs for Stocks and Bonds: If it becomes difficult or expensive to quickly buyand sell stocks and bonds, they will be less desirable. People will want to hold more of their wealth in the form
of money, so the demand for money will rise.
Change in the General Level of Prices: If we have inflation, goods become more expensive,so the demand for money rises.
International Factors:
An increase in the demand of that country's goods abroad. An increase in the demand for domestic investment by foreigners. The belief that the value of the currency will rise in the future. A central banking wanting to increase its holdings of that currency.
F t Whi h I th D d f M
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Factors Which Increase the Demand for Money
A reduction in the interest rate.
A rise in the demand for consumer spending.
A rise in uncertainty about the future and future opportunities.
A rise in transaction costs to buy and sell stocks and bonds.
A rise in inflation causes a rise in the nominal money demand but real moneydemand stays constant.
A rise in the demand for a country's goods abroad.
A rise in the demand for domestic investment by foreigners.
A rise in the belief of the future value of the currency.
A rise in the demand for a currency by central banks (both domestic andforeign).
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