Chapters 10 and 11

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Chapters 10 and 11

• Honors Economics

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The Three Uses of Money
Money as Medium of Exchange A medium of exchange
is anything that is used to determine value
during the exchange of goods and services. Money
as a Unit of Account A unit of account is a means
for comparing the values of goods and services.
Money as a Store of Value A store of value is
something that keeps its value if it is stored
rather than used.
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The Six Characteristics of Money
Durability Objects used as money must withstand
physical wear and tear. Portability People need
to be able to take money with them as they go
about their business. Divisibility To be useful,
money must be easily divided into smaller
denominations, or units of value.
Uniformity Any two units of money must be
uniform, that is, the same, in terms of what they
will buy. Limited Supply Money must be available
only in limited quantities. Acceptability Everyone
must be able to exchange the money for goods and
services.
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The Sources of Moneys Value

• Commodity Money
• Commodity money consists of objects that have
  value in themselves.

• Representative Money
• Representative money has value because the holder
  can exchange it for something else of value.

• Fiat Money
• Fiat money, also called legal tender, has value
  because the government decreed that is an
  acceptable means to pay debts.

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American Banking Before the Civil War
Two Views of Banking

• Antifederalists were against a strong central
  government and favored leaving powers in the
  hands of the states.
• Thomas Jefferson opposed the creation of a
  national bank, and instead favored banks created
  and monitored by individual states.

• Federalists believed the country needed a strong
  central government to establish economic and
  social order.
• Alexander Hamilton was in favor of a national
  bank which could issue a single currency, handle
  federal funds, and monitor other banks.

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Banking in the 20th Century
In 1900, the nation shifted to the gold standard,
a monetary system in which paper money and coins
are equal to the value of a certain amount of
gold. The gold standard had two advantages 1.
It set a definite value on the dollar. 2. The
government could only issue currency if it had
gold in its treasury to back its notes.

• The Federal Reserve Act of 1913 created the
  Federal Reserve System. The Federal Reserve
  System served as the nations first true central
  bank.

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FDIC

• The Banking Act of 1933 created the Federal
  Deposit Insurance Corporation (FDIC). Today, the
  FDIC insures customers deposits up to 100,000.
  The nation was also taken off of the gold
  standard.

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Measuring the Money Supply

• M1
• M1 consists of assets that have liquidity, or the
  ability to be used as, or easily converted into,
  cash.
• Components of M1 include all currency, travelers
  checks, and demand deposits.
• Demand deposits are the money in checking
  accounts.

• M2
• M2 consists of all of the assets in M1, plus
  deposits in savings accounts and money market
  mutual funds.
• A money market mutual fund is a fund that pools
  money from small investors to purchase government
  or corporate bonds.

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Functions of Banks
Storing Money Banks provide a safe, convenient
place for people to store their money. Credit
Cards Banks issue credit cards cards entitling
their holder to buy goods and services based on
each holder's promise to pay. Saving Money Four
of the most common options banks offer for saving
money are 1. Savings Accounts 2. Checking
Accounts 3. Money Market Accounts 4.
Certificates of Deposit (CDs) Loans By making
loans, banks help new businesses get started, and
they help established businesses grow.
Mortgages A mortgage is a specific type of loan
that is used to purchase real estate.
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How Banks make Money

• The largest source of income for banks is the
  interest they receive from customers who have
  taken loans.

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Investing - Chapter 11

• Investment is the act of redirecting resources
  from being consumed today so that they may create
  benefits in the future.
• In short, investment is the use of assets to earn
  income or profit.
• When people save or invest their money, their
  funds become available for businesses to use to
  expand and grow. In this way, investment promotes
  economic growth.

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Risk and Return

• Return and Liquidity
• Savings accounts have greater liquidity, but in
  general have a lower rate of return.
• Certificates of deposit usually have a greater
  return but liquidity is reduced.

• Return and Risk
• Investing in a friends Internet company could
  double your money, but there is the risk of the
  company failing.
• In general, the higher potential return of the
  investment, the greater the risk involved.

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Bonds
Bonds are basically loans, or IOUs, that
represent debt that the government or a
corporation must repay to an investor. Bonds
have three basic components 1. The coupon rate
the interest rate that the issuer will pay the
bondholder. 2. The maturity the time when
payment to the bondholder is due. 3. The par
value the amount that an investor pays to
purchase the bond and that will be repaid to the
investor at maturity. Not all bonds are held to
maturity. Sometimes bonds are traded or sold and
their price may change. Economists therefore
refer to a bonds yield, which is the annual rate
of return on the bond if the bond were held to
maturity.
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Types of Bonds

• Savings Bonds
• Savings bonds are low-denomination (50 to
  10,000) bonds issued by the United States
  government. Savings bonds are purchased below
  par value (a 100 savings bond costs 50 to buy)
  and interest is paid only when the bond matures.
• Treasury Bonds, Bills, and Notes
• These investments are issued by the United States
  Treasury Department.
• Municipal Bonds
• Municipal bonds are issued by state or local
  governments to finance such improvements as
  highways, state buildings, libraries, and
  schools.
• Corporate Bonds
• A corporate bond is a bond that a corporation
  issues to raise money to expand its business.
• Junk Bonds
• Junk bonds are lower-rated, potentially
  higher-paying bonds.

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Other Types of Financial Assets

• Certificates of Deposit
• Certificates of deposit (CDs) are available
  through banks, which use the funds deposited in
  CDs for a fixed amount of time.
• CDs have various terms of maturity, allowing
  investors to plan for future financial needs.

• Money Market Mutual Funds
• Money market mutual funds are special types of
  mutual funds.
• Investors receive higher interest on a money
  market mutual fund than they would receive from a
  savings account or a CD. However, assets in
  money market mutual funds are not FDIC insured.

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Buying Stock

• Corporations can raise money by issuing stock,
  which represents ownership in the corporation. A
  portion of stock is called a share. Stocks are
  also called equities.
• Stockowners can earn a profit in two ways
• 1. Dividends, which are portions of a
  corporations profits, are paid out to
  stockholders of many corporations. The higher
  the corporate profit, the higher the dividend.
• 2. A capital gain is earned when a stockholder
  sells stock for more than he or she paid for it.
  A stockholder that sells stock at a lower price
  than the purchase price suffers a capital loss.

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Types of Stock

• Dividend Differences
• Income stock pays dividends at regular times
  during the year.
• Growth stock pays few or no dividends. Instead,
  the issuing company reinvests earnings into its
  business.

• Decision-Making Differences
• Investors who buy common stock are voting owners
  of the company.
• Preferred stock owners are nonvoting owners of
  the company, but receive dividends before the
  owners of common stock.

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Stock Splits and Stock Risks

• Stock Splits
• A stock split is the division of a single share
  of stock into more than one share.
• Stock splits occur when the price of a stock
  becomes so high that it discourages potential
  investors from buying it.

• Risks of Buying Stock
• Purchasing stock is risky because the firm
  selling the stock may encounter economic
  downturns that force dividends down or reduce the
  stocks value. It is considered a riskier
  investment than bonds.

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How Stocks Are Traded

• A stockbroker is a person who links buyers and
  sellers of stock.
• Stockbrokers work for brokerage firms, or
  businesses that specialize in trading stock.
• Some stock is bought and sold on stock exchanges,
  or markets for buying and selling stock.

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Stock Exchanges

• The New York Stock Exchange (NYSE)
• The NYSE is the countrys largest stock exchange.
  Only stocks for the largest and most established
  companies are traded on the NYSE.
• AMEX
• Small and mid cap stocks, has a trading floor
  and specializes in energy and start ups
• NASDAQ
• High tech stocks done with computers, no actual
  trading floor
• The OTC Market
• The OTC market (over-the-counter) is an
  electronic marketplace for stock that is not
  listed or traded on an organized exchange. Penny
  stocks and high risk
• Daytrading
• Daytraders use computer programs to try and
  predict minute-by-minute price changes in hopes
  of earning a profit.

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Measuring Stock Performance

• Bull and Bear Markets
• When the stock market rises steadily over time, a
  bull market exists. Conversely, when the stock
  market falls over a period of time, its called a
  bear market.
• Stock Performance Indexes
• The Dow Jones Industrial Average
• The Dow is an index that shows how stocks of 30
  companies in various industries have changed in
  value.
• The S P 500
• The S P 500 is an index that tracks the
  performance of 500 different stocks.

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Stock Info

• Yield - dividend compared to price of stock
• High / Low - Highest and Lowest price paid for a
  stock in one day
• 52 week high and low - highest and lowest price
  paid for a stock in the last fiscal year
• P/E ratio - price of stock compared to earnings
  of company per share (low is good, can only
  compare within industry)
• Volume (sales) 100s - amount of shares bought
  and sold in one day
• Close - last price paid for a share at closing
• Change - price change from the day before

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Basic Stock Quote Page