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Back to Table of Contents pp. 174-189 Chapter 12 Money and Financial Institutions
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pp. 174-189
Chapter 12 Money andFinancial Institutions
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Introduction to Business, Money and Financial Institutions Slide 2 of 60
Learning ObjectivesLearning ObjectivesAfter completing this chapter, you’ll be After completing this chapter, you’ll be able to:able to:
1.1. Describe Describe the functions and characteristics of money.
2.2. ExplainExplain the services that banks offer.
continued
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Introduction to Business, Money and Financial Institutions Slide 3 of 60
Learning ObjectivesLearning ObjectivesAfter completing this chapter, you’ll be After completing this chapter, you’ll be able to:able to:
3.3. NameName the types of banks.
4.4. IdentifyIdentify the functions of the Federal Reserve System.
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Introduction to Business, Money and Financial Institutions Slide 4 of 60
Why It’s ImportantWhy It’s Important
Understanding the way money and financial institutions work is crucial to understanding the economy.
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Introduction to Business, Money and Financial Institutions Slide 5 of 60
Key WordsKey Words
monetary systemmoneyfinancial institutionbank accountdepositwithdrawalinterest continued
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Introduction to Business, Money and Financial Institutions Slide 6 of 60
Key WordsKey Words
electronic funds transfer (EFT)collateralmortgagesafety-deposit boxFederal Reserve System
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Introduction to Business, Money and Financial Institutions Slide 7 of 60
The History of Money The History of Money In the monetary system goods and services are indirectly exchanged using money, which can then be exchanged for other goods and services.
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The History of Money The History of Money Money can be anything that people accept as a standard for payment.
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Introduction to Business, Money and Financial Institutions Slide 9 of 60
The History of Money The History of Money In other times and places people have used shells, stones, corn, parrot feathers, and even gopher tails for money.
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Introduction to Business, Money and Financial Institutions Slide 10 of 60
Figure12.1 WOULD THESE ITEMS BE ACCEPTABLE AS MONEY?
Imagine what business would be like without money. If you worked in a fast-food restaurant, it might pay you in food. Bartering is exchanging one product for another. American Colonialists engaged in this way of doing business.Explain why or why not these items could serve as money. Recreate this table and check the appropriate box(es) for each that applies.
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Introduction to Business, Money and Financial Institutions Slide 11 of 60
Functions of Money Functions of Money The three basic functions of money are:
1. It is a medium of exchange2. It is a standard of value 3. It is a store of value
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Introduction to Business, Money and Financial Institutions Slide 12 of 60
Characteristics of Money Characteristics of Money For money to carry out its functions, it must have several characteristics. Money must be:
• Stable in value• Scarce• Accepted
continued
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Introduction to Business, Money and Financial Institutions Slide 13 of 60
Characteristics of Money Characteristics of Money Money must be:
• Divisible into parts • Portable and durable
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Introduction to Business, Money and Financial Institutions Slide 14 of 60
Graphic OrganizerFunctions and Characteristics of MoneyFunctions and Characteristics of Money
Graphic OrganizerGraphic Organizer
FUNCTIONS
• Medium of exchange• Standard of value• Store of value
CHARACTERISTICS• Stable• Scarce• Accepted• Divisible• Portable• Durable
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Introduction to Business, Money and Financial Institutions Slide 15 of 60
Fast Review
1. What is the monetary system?
2. How is money a standard of value?
continued
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Fast Review
3. What are some of the characteristics money must have to be useful?
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Banking Banking The banking system is the main type of financial institution, or organization for managing money, in our economy.
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Introduction to Business, Money and Financial Institutions Slide 18 of 60
Storing Money Storing Money A bank account is a record of how much money a customer has put into or taken out of a bank.
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Introduction to Business, Money and Financial Institutions Slide 19 of 60
Storing Money Storing Money The money put in a bank is called a deposit.
The money taken out of a bank is called a withdrawal.
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Introduction to Business, Money and Financial Institutions Slide 20 of 60
Storing Money Storing Money Checking accounts are used for storing money in the short term so you can draw on it easily if you want to go shopping or pay a bill.
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Introduction to Business, Money and Financial Institutions Slide 21 of 60
Storing Money Storing Money Savings accounts are used for storing money over a long period of time.
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Introduction to Business, Money and Financial Institutions Slide 22 of 60
Storing Money Storing Money Interest is a rate the bank pays you for keeping your money there.
If a bank pays you 5 percent interest per year on a $1,000 savings account, you’ll have earned $50 after one year.
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Introduction to Business, Money and Financial Institutions Slide 23 of 60
Simple interest, compounded annually, is a percentage of the amount borrowed. The amount borrowed is called the principal. Compound interest may be compounded daily, monthly, or yearly.
continued
Understanding InterestBusiness Building BlocksBusiness Building Blocks
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Introduction to Business, Money and Financial Institutions Slide 24 of 60
Simple interest. You borrow $1,000 for 3 years at a rate of 10 percent per year. Here’s how to find out the amount you owe at the end of three years:
continued
How to Compute InterestBusiness Building BlocksBusiness Building Blocks
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Introduction to Business, Money and Financial Institutions Slide 25 of 60
Step 1. Convert the interest rate percent to its decimal equivalent.
continued
How to Compute InterestBusiness Building BlocksBusiness Building Blocks
(10% = 10/100 = .10)
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Introduction to Business, Money and Financial Institutions Slide 26 of 60
Step 2. Use this formula:
interest = principal x interest rate x time
continued
How to Compute InterestBusiness Building BlocksBusiness Building Blocks
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Introduction to Business, Money and Financial Institutions Slide 27 of 60
Principal
continued
How to Compute InterestBusiness Building BlocksBusiness Building Blocks
Decimal Interest
RateTime Interest=xx
$1,000 x .10 x 3 = $300
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Introduction to Business, Money and Financial Institutions Slide 28 of 60
At the end of 3 years, the cost of the loan would be $300. Since you also must pay back the principal, you owe the lender $1,300.
How to Compute InterestBusiness Building BlocksBusiness Building Blocks
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Introduction to Business, Money and Financial Institutions Slide 29 of 60
Transferring MoneyTransferring MoneyBanks make it easy to transfer money from one person or business to another.
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Introduction to Business, Money and Financial Institutions Slide 30 of 60
Transferring MoneyTransferring MoneyToday more banks are using electronic funds transfer (EFT) to move money around.
With EFT, money is transferred from one account to another through a network of computers.
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Introduction to Business, Money and Financial Institutions Slide 31 of 60
Lending Money Lending Money The money you deposit in a bank makes it possible for the bank to lend money to other customers.
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Introduction to Business, Money and Financial Institutions Slide 32 of 60
Lending Money Lending Money Most bank loans require some form of collateral.
Collateral is something valuable you put up for a loan.
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Introduction to Business, Money and Financial Institutions Slide 33 of 60
Lending Money Lending Money The four main types of loans that banks offer are:
• A mortgage loan• A commercial loan• An individual loan• A line of credit
continued
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Lending Money Lending Money A mortgage is a deed to give the property to the lender if the loan is not paid back.
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Other Financial ServicesOther Financial ServicesMany banks provide financial advice on managing and investing your money.
You can also store valuable items, such as jewelry and certificates, in safety-deposit boxes.
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Introduction to Business, Money and Financial Institutions Slide 36 of 60
Other Financial ServicesOther Financial Services
Many banks offer credit cards.
Banks also manage trust funds, such as an inheritance.
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Figure12.2 HOW BANKS DO BUSINESS
Banks are businesses that provide financial services to make a profit.
What would happen to a bank’s profits if deposits suddenly decreased?
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Introduction to Business, Money and Financial Institutions Slide 38 of 60
Fast Review
1. What are the three main functions of a bank?
2. How does an EFT work?
continued
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Introduction to Business, Money and Financial Institutions Slide 39 of 60
Fast Review
3. What are the types of loans a bank offers?
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Introduction to Business, Money and Financial Institutions Slide 40 of 60
Commercial Banks Commercial Banks Commercial banks offer a full range of services such as checking and savings accounts, loans, and financial advice.
They are often called full-service banks.
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Commercial Banks Commercial Banks To make a profit, commercial banks usually charge much more interest on the money they lend than the interest they pay on savings accounts.
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Introduction to Business, Money and Financial Institutions Slide 42 of 60
Savings and Loan Associations Savings and Loan Associations Savings and loan associations were originally set up to offer savings accounts and home mortgage loans.
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Introduction to Business, Money and Financial Institutions Slide 43 of 60
Savings and Loan Associations Savings and Loan Associations The purpose of the savings and loan associations was to encourage people to save money and make it easier to buy a home or start a business.
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Introduction to Business, Money and Financial Institutions Slide 44 of 60
Savings and Loan Associations Savings and Loan Associations Savings and loan associations charged lower interest on loans and paid higher interest on savings.
In the 1980s about 20 percent of savings and loans failed.
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Introduction to Business, Money and Financial Institutions Slide 45 of 60
Savings and Loan Associations Savings and Loan Associations The government passed new regulations allowing savings and loan associations to charge higher interest rates and offer more services like credit cards.
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Introduction to Business, Money and Financial Institutions Slide 46 of 60
Credit Unions Credit Unions Credit unions are nonprofit banks set up by organizations for their members to use.
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Introduction to Business, Money and Financial Institutions Slide 47 of 60
Credit Unions Credit Unions Credit unions offer members a full range of services, including credit cards, checking accounts, and loans.
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Introduction to Business, Money and Financial Institutions Slide 48 of 60
Credit Unions Credit Unions Credit unions offer low-interest loans and pay high interest rates on savings accounts.
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Introduction to Business, Money and Financial Institutions Slide 49 of 60
Other Financial Institutions Other Financial Institutions Mortgage companies provide loans specifically for buying a home or business.
Finance companies offer short-term loans to businesses.
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Introduction to Business, Money and Financial Institutions Slide 50 of 60
Other Financial Institutions Other Financial Institutions Insurance companies not only provide protection against things like fire and theft, but also offer loans to businesses.
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Introduction to Business, Money and Financial Institutions Slide 51 of 60
Other Financial Institutions Other Financial Institutions Brokerage firms that sell stocks and bonds may also offer a wide range of financial services to its customers.
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Introduction to Business, Money and Financial Institutions Slide 52 of 60
Fast Review
1. What are the types of banks?
2. How is a credit union different from a commercial bank?
continued
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Introduction to Business, Money and Financial Institutions Slide 53 of 60
Fast Review
3. Name some financial institutions other than banks that offer similar services.
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Introduction to Business, Money and Financial Institutions Slide 54 of 60
The Federal Reserve SystemThe Federal Reserve SystemThe Federal Reserve System (or Fed) is the central banking organization in the United States.
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Introduction to Business, Money and Financial Institutions Slide 55 of 60
The Federal Reserve SystemThe Federal Reserve SystemCongress set up the Fed in 1913 to end the periodic financial panics that occurred during the 1800s and early 1900s.
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The Federal Reserve SystemThe Federal Reserve SystemThe Fed consists of 12 Federal Reserve district banks, 25 branch banks, and about 5,000 member banks.
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Introduction to Business, Money and Financial Institutions Slide 57 of 60
Functions of the FedFunctions of the FedThe six functions of the Fed are:
• Clearing checks • Acting as the federal government’s
fiscal agent • Supervising member banks
continued
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Introduction to Business, Money and Financial Institutions Slide 58 of 60
Functions of the FedFunctions of the Fed
• Regulating the money supply • Setting reserve requirements • Supplying paper currency
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Introduction to Business, Money and Financial Institutions Slide 59 of 60
Fast Review
1. What is the Fed?
2. Name the six functions of the Fed.
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Introduction to Business, Money and Financial Institutions Slide 60 of 60
A bank must keep in its reserve 20 percent of a new deposit. How much money does the bank need to keep if it lends you $800?
continued
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pp. 174-189
End ofChapter 12 Money andFinancial Institutions
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