Show Me the Money!Show Me the Money!

Unit 4Unit 4Money, Banking, and FinanceMoney, Banking, and Finance

What is MONEY?What is MONEY?

Define:Define: 1. Money1. Money 2. Medium of Exchange2. Medium of Exchange 3. Barter3. Barter 4. Standard of Value4. Standard of Value 5. Store of Value5. Store of Value

What are the Properties of MoneyWhat are the Properties of Money Define: Define: 6. Durability6. Durability 7. Portability7. Portability 8. Divisibility8. Divisibility 9. Uniformity9. Uniformity 10. What 3 other conditions 10. What 3 other conditions

are necessary for money to are necessary for money to be useful?be useful?

Martin Frankel #10Martin Frankel #10 $200 million$200 million As his deception deepened he began As his deception deepened he began

scrambling for respectability, scrambling for respectability, attempting to align his companies attempting to align his companies with the Vatican by offering $50 with the Vatican by offering $50 million to found a St. Francis of Assisi million to found a St. Francis of Assisi Foundation for the Church. Foundation for the Church.

In an attempt to get away, Frankel In an attempt to get away, Frankel converted much of his money – converted much of his money – literally millions of dollars – into literally millions of dollars – into diamonds, acquired fake papers and diamonds, acquired fake papers and bought a private jet before flying to bought a private jet before flying to Germany (taking two of his Germany (taking two of his mistresses with him). Arrested in mistresses with him). Arrested in Hamburg, he was accused of using a Hamburg, he was accused of using a false passport and smuggling false passport and smuggling diamonds before being sentenced to diamonds before being sentenced to three years in jail for these crimes – three years in jail for these crimes – nothing compared to what he got nothing compared to what he got following his extradition to America following his extradition to America in 2004…in 2004…

What are the Types of Money?What are the Types of Money?

12. What is 12. What is Representative Representative Money?Money?

11. What is Commodity Money?11. What is Commodity Money?

•Good which carries a value in itselfGood which carries a value in itself•PigsPigs•rare seashellsrare seashells• whale's teethwhale's teeth•(often) cattle(often) cattle• In medieval Iraq, bread was used as In medieval Iraq, bread was used as an early form of currency.an early form of currency.•In World War II and prison it is In World War II and prison it is cigarettescigarettes• goldgold

Interesting ExamplesInteresting ExamplesSolomon Islands and YapSolomon Islands and Yap

Shells are chipped into rough Shells are chipped into rough circles, filed down, and threaded circles, filed down, and threaded onto large necklaces, which are onto large necklaces, which are then used during marriage then used during marriage proposalsproposals

A father may charge twenty shell A father may charge twenty shell money necklaces for his money necklaces for his daughter's hand in marriage. daughter's hand in marriage.

Huge limestone coins from the Huge limestone coins from the Micronesian island of YapMicronesian island of Yap

Quarried at great peril from a Quarried at great peril from a source several hundred miles source several hundred miles away.away.

The value of the coin was The value of the coin was determined by its size - the determined by its size - the largest of which could range from largest of which could range from nine to twelve feet in diameter nine to twelve feet in diameter and weigh several tons. and weigh several tons.

13. What is Fiat Money?13. What is Fiat Money? Fiat money - a type of Fiat money - a type of currencycurrency whose only value is that a whose only value is that a

government made a government made a fiatfiat (i.e. decreed) that the (i.e. decreed) that the moneymoney is a is a legal method of exchange legal method of exchange

It has no value itselfIt has no value itself

Money in the United StatesMoney in the United States 14. Currency is made 14. Currency is made

up of what 2 up of what 2 components?components?

15. What do we call 15. What do we call checking accounts?checking accounts?

16. What do we call 16. What do we call savings accounts and savings accounts and time deposits?time deposits?

THINK: Why are they THINK: Why are they called “near” money?called “near” money?

17. What is M1?17. What is M1? 18. What is M2? 18. What is M2?

– Savings Deposits +Savings Deposits +– Small Time Deposits +Small Time Deposits +– Money Market Mutual Money Market Mutual

Funds + and other Funds + and other minor categoriesminor categories

M1 - The most familiar M1 - The most familiar form of money used form of money used includes:includes:– CoinsCoins– CurrencyCurrency– Check DepositsCheck Deposits– Travelers ChecksTravelers Checks

Section 2Section 2The Development of US BankingThe Development of US Banking

Early banks issued bank Early banks issued bank notes, convertible to specie notes, convertible to specie (gold or silver)(gold or silver)

The Bank of the United The Bank of the United States (1791-1811) was the States (1791-1811) was the first U.S. central bankfirst U.S. central bank

19. Who was the first 19. Who was the first Secretary of the Treasury?Secretary of the Treasury?

Second Bank of the United Second Bank of the United States (1816-1832)States (1816-1832)– President Jackson vetoed President Jackson vetoed

renewal of charter in 1832renewal of charter in 1832

Federal Banking LegislationFederal Banking Legislation National Banking Acts of 1863 National Banking Acts of 1863

and 1864and 1864– Promoted a safe and uniform Promoted a safe and uniform

currency currency – Aided in financing Civil WarAided in financing Civil War– Began issuance of uniform Began issuance of uniform

bank notes printed by U.S. bank notes printed by U.S. Treasury, backed by Federal Treasury, backed by Federal GovernmentGovernment

#4 - #4 - Bernard Ebbers – 25 Bernard Ebbers – 25 years in jail. years in jail.

In 2002 a small team of In 2002 a small team of internal auditors uncovered internal auditors uncovered the $3.8 billion fraud, and the $3.8 billion fraud, and shortly thereafter several shortly thereafter several WorldCom executives were WorldCom executives were fired and the SEC launched a fired and the SEC launched a formal investigation. formal investigation.

It eventually emerged that It eventually emerged that many billions of losses had many billions of losses had been concealed using false been concealed using false accounting practices, and accounting practices, and some of the money had been some of the money had been siphoned off for personal use. siphoned off for personal use.

On July 21, 2002, WorldCom On July 21, 2002, WorldCom filed for bankruptcyfiled for bankruptcy in the in the largest such filing in US largest such filing in US history at the time history at the time

Origins of the Federal Reserve Origins of the Federal Reserve SystemSystem

Prior to 1863, banks issued Prior to 1863, banks issued bank notes that functioned bank notes that functioned like our present day like our present day currency but were the currency but were the obligations of individual obligations of individual banks.banks.– The quantity of money in The quantity of money in

circulation fluctuated with circulation fluctuated with the business cyclethe business cycle

– The economy suffered The economy suffered several recessions and several recessions and crises, culminating in the crises, culminating in the crash of 1907.crash of 1907.

– 20. These problems led to 20. These problems led to the passage of the what the passage of the what Act in 1913?Act in 1913?

Jérôme Kerviel #3 – $4.9 billion Jérôme Kerviel #3 – $4.9 billion Among the tricks used to hide Among the tricks used to hide

his activities was to send fake e-his activities was to send fake e-mails justifying missing trades, mails justifying missing trades, as well as stealing his as well as stealing his colleagues’ log-in details in order colleagues’ log-in details in order to conduct trades in their names. to conduct trades in their names.

He was eventually uncovered He was eventually uncovered when the bank could find no when the bank could find no trace of him receiving the trace of him receiving the purported messages in their e-purported messages in their e-mail archival systemmail archival system

The Great Depression and the New DealThe Great Depression and the New Deal

21. What 2 reforms were 21. What 2 reforms were instituted by the Banking Act of instituted by the Banking Act of 1933?1933?

22. What type of savings 22. What type of savings institutions were deregulated in institutions were deregulated in 1980 and 1982?1980 and 1982?

23. What was the result?23. What was the result?

#1 – Bernard Madoff #1 – Bernard Madoff He created what is probably He created what is probably

the biggest corporate con in the biggest corporate con in history – essentially a massive history – essentially a massive ponzi scheme – by ponzi scheme – by encouraging investment from encouraging investment from wealthy individuals and wealthy individuals and companies around the world, companies around the world, and then using further and then using further investment rather than profit investment rather than profit to payoff existing investors, to payoff existing investors, keeping the difference keeping the difference himself. himself.

The former chairman of the The former chairman of the NASDAQ stock exchange was NASDAQ stock exchange was held in such high regard, held in such high regard, investors actively sought him investors actively sought him out to casually plead with him out to casually plead with him to manage their savings so to manage their savings so they could start reaping the they could start reaping the steady, solid returns their steady, solid returns their envied friends were getting.envied friends were getting.

Sentence 150 years and Sentence 150 years and restitutionrestitution

During World War IDuring World War I

In 1900 paper In 1900 paper money had to be money had to be backed by an backed by an equal amount of equal amount of gold.gold.

US raised money US raised money to support the to support the war by selling war by selling liberty bondsliberty bonds

Great DepressionGreat Depression Banks invested in the Banks invested in the

stock market during stock market during the 1920s.the 1920s.

When the market When the market crashed in 1929, bank crashed in 1929, bank depositors rushed to depositors rushed to withdraw their withdraw their deposits in cash. deposits in cash.

These runs on banks These runs on banks ensured that many ensured that many banks failed. banks failed.

Turn in your gold?Turn in your gold?

1934 – government 1934 – government required citizens to required citizens to turn in their gold turn in their gold and replace with and replace with paper currencypaper currency

TodayTodayInconvertible Fiat Money StandardInconvertible Fiat Money Standard

Since 1968 only coins and Federal Reserve Notes Since 1968 only coins and Federal Reserve Notes are part of US currencyare part of US currency

Today only backed by “faith and confidence” in US Today only backed by “faith and confidence” in US governmentgovernment

Fluctuates on commodity marketFluctuates on commodity market

Financial Institutions in the USFinancial Institutions in the US

24. What are the 3 24. What are the 3 types of financial types of financial institutions in our institutions in our banking system banking system today?today?

25. What can 25. What can customers of these customers of these institutions do with institutions do with money?money?

26. What are the 2 26. What are the 2 largest bankslargest banks in in the US?the US?

Banking DeregulationBanking Deregulation 27. What percent of US banks have assets less than $1 27. What percent of US banks have assets less than $1

billion?billion? 28. What 2 benefits have consumers received from the 28. What 2 benefits have consumers received from the

deregulation of the banking industry?deregulation of the banking industry?

Technology and BankingTechnology and Banking

29. What are 4 29. What are 4 new banking new banking services which are services which are a product of a product of increased increased technology?technology?

30. What is a 30. What is a stored value card stored value card and why does and why does Clark Howard NOT Clark Howard NOT like them?like them?

Chapter 11Chapter 11Financial MarketsFinancial Markets

31. What are 31. What are the 2 choices the 2 choices for your for your money?money?

32. What is the 32. What is the value of value of investment to investment to the consumer?the consumer?

33. Define 33. Define financial asset.financial asset.

Savings and InvestmentSavings and Investment 34. What type of 34. What type of

market allows a market allows a financial financial institution to institution to collect funds collect funds from savers and from savers and invest these invest these funds?funds?

35. What type of 35. What type of fund combines fund combines the money of the money of many small many small investors?investors?

Investment StrategiesInvestment Strategies

36. What are the 4 types of 36. What are the 4 types of financial intermediaries?financial intermediaries?

Financial Assets MarketsFinancial Assets Markets

Define: (322)Define: (322) 37. Capital 37. Capital

marketmarket 38. Money 38. Money

marketmarket 39. Primary 39. Primary

marketmarket 40. Secondary 40. Secondary

marketmarket

Time and ResalabilityTime and Resalability

41. What 2 41. What 2 markets are time-markets are time-sensitive?sensitive?

42. What 2 42. What 2 markets are markets are based on whether based on whether the assets can be the assets can be resold?resold?

Investing in a Market EconomyInvesting in a Market Economy

43. What is the 43. What is the term describing term describing the goal you must the goal you must first set before first set before you begin you begin investing?investing?

44. What two 44. What two conditions must conditions must you consider you consider before creating a before creating a plan?plan?

Risk and Return Risk and Return OROR

Don’t Put All Your Eggs in One BasketDon’t Put All Your Eggs in One Basket 45. What is the 45. What is the

term for the term for the possibility for loss possibility for loss in an investment?in an investment?

46. What is the 46. What is the term for the profit term for the profit or loss made on an or loss made on an investment?investment?

47. Why is 47. Why is diversification so diversification so important in an important in an investment investment portfolio? portfolio?

What Kind of Return do you Want?What Kind of Return do you Want?

48. What kind of risk is 48. What kind of risk is involved in putting involved in putting your money in a low your money in a low paying savings paying savings account?account?

49. What risk is 49. What risk is involved in purchasing involved in purchasing stocks from a new stocks from a new company?company?

50. What is the 50. What is the correlation between correlation between RISK and REWARD?RISK and REWARD?

The Tradeoff between Risk and ReturnThe Tradeoff between Risk and Return

Risk(standarddeviation)

0 5 10 15 20

8.3

3.1

Return(percentper year)

50%stocks

25%stocks

Nostocks

100%stocks

75%stocks

Copyright©2004 South-Western

The Stock MarketsThe Stock Markets 51. Securities are bought and 51. Securities are bought and

sold on a _____ ______. sold on a _____ ______.

52. What is the profit received 52. What is the profit received from the sale of those stocks?from the sale of those stocks?

53. What are the 2 reasons 53. What are the 2 reasons investors buy stocks?investors buy stocks?

54. What is the benefit of 54. What is the benefit of buying Common Stock?buying Common Stock?

55. What is the benefit of 55. What is the benefit of buying Preferred Stock?buying Preferred Stock?

Organized Stock ExchangesOrganized Stock Exchanges 56. What is the Dow-Jones Industrial 56. What is the Dow-Jones Industrial

Average?Average?– Most widely publicized and popularMost widely publicized and popular– 30 30

Standard & Poor’s 500?Standard & Poor’s 500?– 500 representative stocks500 representative stocks– Follows overall market performanceFollows overall market performance

57. What is the contract to buy or sell a 57. What is the contract to buy or sell a stock on a future specified date at a stock on a future specified date at a preset price?preset price?

58. Where are future contracts for 58. Where are future contracts for agricultural products bought and sold?agricultural products bought and sold?

59. These are examples of sets of stock 59. These are examples of sets of stock which are reported together. What is which are reported together. What is this called?this called?

Do I Have the Option?Do I Have the Option? Contracts that Contracts that

provide the right provide the right to purchase or to purchase or sell at some sell at some future agreed future agreed priceprice

60. What is the 60. What is the Call option?Call option?– right to buy stock right to buy stock

at specified priceat specified price 61. What is the 61. What is the

Put option?Put option?– right to sell stock right to sell stock

at specified priceat specified price

Liquidity and VolatilityLiquidity and Volatility 62. What is Liquidity? 62. What is Liquidity?

– The ability of an The ability of an assetasset to be to be converted into cash quickly converted into cash quickly and without any price and without any price discountdiscount. .

63. What is Volatility?63. What is Volatility?– The relative rate at which The relative rate at which

the the priceprice of a of a securitysecurity moves moves up and down. up and down.

If the price of a stock moves If the price of a stock moves up and down rapidly over up and down rapidly over short time periods, it has short time periods, it has high volatility. If the price high volatility. If the price almost never changes, it has almost never changes, it has low volatility. low volatility.

Market EfficiencyMarket Efficiency

64. Define 64. Define Efficient Efficient market market hypothesishypothesis– Stocks are Stocks are

always priced always priced about rightabout right

Is it a Bear Market Is it a Bear Market or a Bull Market?or a Bull Market?

65. If stock 65. If stock prices rise prices rise steadily over a steadily over a long period of long period of time, what type time, what type of market?of market?

66. If stock 66. If stock market prices market prices decline over a decline over a long period of long period of time what type time what type of market?of market?

Bonds and Other Financial InstrumentsBonds and Other Financial Instruments

67. Bonds are LOANS. 67. Bonds are LOANS. The are sold at LESS The are sold at LESS than the face value than the face value with the promise to with the promise to pay back the loan at a pay back the loan at a set time. What is the set time. What is the date when the bond date when the bond must be paid back?must be paid back?

68. What is the 68. What is the amount which must be amount which must be paid on that date?paid on that date?

Buying BondsBuying Bonds 69. What are 2 69. What are 2

reasons an reasons an investor might investor might but a bond? but a bond?

70. What is the 70. What is the correlation correlation between the between the amount of time amount of time the bond is held the bond is held and the amount and the amount of interest which of interest which will be paid?will be paid?

Types of BondsTypes of BondsMatchingMatching

71. High risk but the potential 71. High risk but the potential for very high yieldsfor very high yields

72. Back by the “full faith and 72. Back by the “full faith and credit” of the US governmentcredit” of the US government

73. Used for construction, 73. Used for construction, bridges, schools and other bridges, schools and other projects by state and local projects by state and local governmentsgovernments

74. Used to provide 74. Used to provide investment capital for investment capital for corporations.corporations.

75. What are the 2 ratings 75. What are the 2 ratings systems for bonds?systems for bonds?

A. Treasury A. Treasury BondsBonds

B. Municipal B. Municipal BondsBonds

C. Corporate C. Corporate BondsBonds

D. Junk BondsD. Junk Bonds

Other Financial InstrumentsOther Financial Instruments 76. What does CD 76. What does CD

stand for?stand for? 77. What condition 77. What condition

changes the rate of changes the rate of interest on a CD?interest on a CD?

78. What makes up a 78. What makes up a Money Market Mutual Money Market Mutual Fund?Fund?

79. Why is there less 79. Why is there less risk with a MMMF as risk with a MMMF as compared to a CD?compared to a CD?

How does the Banking System work?How does the Banking System work?

Bank receives Bank receives deposits from deposits from both individuals both individuals and large and large companies companies

These are a These are a bank’s bank’s liability.liability.

The bank The bank receives receives assetsassets in the form of the in the form of the interest it interest it charges on loanscharges on loans

A Bank is a BusinessA Bank is a Business Banks are like other Banks are like other

businesses except their businesses except their product is money. product is money.

Banks sell money instead Banks sell money instead of services or productsof services or products

The interest they charge is The interest they charge is higher than the interest higher than the interest they pay on depositors they pay on depositors accounts. accounts.

The The interest rateinterest rate a bank a bank charges its customers charges its customers depends on the number of depends on the number of people who want to borrow people who want to borrow the money and the amount the money and the amount of money the bank has of money the bank has available. SUPPLY AND available. SUPPLY AND DEMAND!DEMAND!

The Money MultiplierThe Money Multiplier When one bank loans When one bank loans

money, that money is money, that money is generally deposited generally deposited into another or the into another or the same bank thus same bank thus creating more creating more deposits and more deposits and more reserves to be lent reserves to be lent out. out.

80. What is the 80. What is the Money Multiplier? Money Multiplier? – the amount of the amount of

money that the money that the banking system banking system generates with each generates with each dollar of reserves.dollar of reserves.

Assets Liabilities

First National Bank

Reserves$10.00

Loans$90.00

Deposits$100.00

Total Assets$100.00

Total Liabilities$100.00

The Money MultiplierThe Money Multiplier

Assets Liabilities

First National Bank

Reserves$10.00

Loans$90.00

Deposits$100.00

Total Assets$100.00

Total Liabilities$100.00

Assets Liabilities

Second National Bank

Reserves$9.00

Loans$81.00

Deposits$90.00

Total Assets$90.00

Total Liabilities$90.00

The Money MultiplierThe Money Multiplier

Assets Liabilities

First National Bank

Reserves$10.00

Loans$90.00

Deposits$100.00

Total Assets$100.00

Total Liabilities$100.00

Assets Liabilities

Second National Bank

Reserves$9.00

Loans$81.00

Deposits$90.00

Total Assets$90.00

Total Liabilities$90.00

What determines the size of the What determines the size of the money multiplier?money multiplier?

The money multiplier is The money multiplier is the reciprocal of the the reciprocal of the reserve ratio.reserve ratio.– With a reserve With a reserve

requirement (R) of 20% requirement (R) of 20% or 1/5 . . .or 1/5 . . .

– The multiplier will be 5.The multiplier will be 5.

1 R

M =