Introduction to Business, Money and Financial Institutions Slide 1 of 65 Money and Financial Institutions

Introduction to Business, Money and Financial Institutions Slide 2 of 65 Learning Objectives After completing this chapter, you’ll be able to: 1.Describe 1.Describe the functions and characteristics of money. 2.Explain 2.Explain the services that banks offer. 3.Name 3.Name the types of banks. 4.Identify 4.Identify the functions of the Federal Reserve System.

Introduction to Business, Money and Financial Institutions Slide 3 of 65 Why It’s Important Understanding the way money and financial institutions work is crucial to understanding the economy.

Introduction to Business, Money and Financial Institutions Slide 4 of 65 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.

Introduction to Business, Money and Financial Institutions Slide 5 of 65 The History of Money Money can be anything that people accept as a standard for payment. In other times and places people have used shells, stones, corn, parrot feathers, and even gopher tails for money.

Introduction to Business, Money and Financial Institutions Slide 6 of 65 Figure 12.1 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.

Introduction to Business, Money and Financial Institutions Slide 7 of 65 Functions of Money The three basic functions of money are: 1.It is a medium of exchange 2.It is a standard of value 3.It is a store of value

Introduction to Business, Money and Financial Institutions Slide 8 of 65 Characteristics of Money For money to carry out its functions, it must have several characteristics. Money must be: Stable in value Scarce Accepted Divisible into parts Portable and durable

Introduction to Business, Money and Financial Institutions Slide 9 of 65 Graphic Organizer Functions and Characteristics of Money Graphic Organizer FUNCTIONS Medium of exchange Standard of value Store of value CHARACTERISTICS Stable Scarce Accepted Divisible Portable Durable

Introduction to Business, Money and Financial Institutions Slide 10 of 65 Banking The banking system is the main type of financial institution, or organization for managing money, in our economy.

Introduction to Business, Money and Financial Institutions Slide 11 of 65 Storing Money A bank account is a record of how much money a customer has put in to or taken out of a bank. The money put in a bank is called a deposit. The money taken out of a bank is called a withdrawal.

Introduction to Business, Money and Financial Institutions Slide 12 of 65 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. Savings accounts are used for storing money over a long period of time.

Introduction to Business, Money and Financial Institutions Slide 13 of 65 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.

Introduction to Business, Money and Financial Institutions Slide 14 of 65 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 Interest Business Building Blocks

Introduction to Business, Money and Financial Institutions Slide 15 of 65 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 Interest Business Building Blocks

Introduction to Business, Money and Financial Institutions Slide 16 of 65 Step 1. Convert the interest rate percent to its decimal equivalent. continued How to Compute Interest Business Building Blocks (10% = 10/100 =.10)

Introduction to Business, Money and Financial Institutions Slide 17 of 65 Step 2. Use this formula: interest = principal x interest rate x time continued How to Compute Interest Business Building Blocks

Introduction to Business, Money and Financial Institutions Slide 18 of 65 Transferring Money Banks make it easy to transfer money from one person or business to another. Today 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.

Introduction to Business, Money and Financial Institutions Slide 19 of 65 Lending Money The money you deposit in a bank makes it possible for the bank to lend money to other customers. Most bank loans require some form of collateral. Collateral is something valuable you put up for a loan.

Introduction to Business, Money and Financial Institutions Slide 20 of 65 Lending Money The four main types of loans that banks offer are: 1. A mortgage loan 2. A commercial loan 3. An individual loan 4. A line of credit continued

Introduction to Business, Money and Financial Institutions Slide 21 of 65 Lending Money A mortgage is a deed to give the property to the lender if the loan is not paid back.

Introduction to Business, Money and Financial Institutions Slide 22 of 65 Other Financial Services Many 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. Many banks offer credit cards. Banks also manage trust funds, such as an inheritance.

Introduction to Business, Money and Financial Institutions Slide 23 of 65 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. To make a profit, commercial banks usually charge much more interest on the money they lend than the interest they pay on savings accounts.

Introduction to Business, Money and Financial Institutions Slide 24 of 65 Savings and Loan Associations Savings and loan associations were originally set up to offer savings accounts and home mortgage loans. 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.

Introduction to Business, Money and Financial Institutions Slide 25 of 65 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. The government passed new regulations allowing savings and loan associations to charge higher interest rates and offer more services like credit cards.

Introduction to Business, Money and Financial Institutions Slide 26 of 65 Credit Unions Credit unions are nonprofit banks set up by organizations for their members to use. Credit unions offer members a full range of services, including credit cards, checking accounts, and loans. Credit unions offer low-interest loans and pay high interest rates on savings accounts.

Introduction to Business, Money and Financial Institutions Slide 27 of 65 Other Financial Institutions Mortgage companies provide loans specifically for buying a home or business. Insurance companies not only provide protection against things like fire and theft, but also offer loans to businesses. Brokerage firms that sell stocks and bonds may also offer a wide range of financial services to its customers.

Introduction to Business, Money and Financial Institutions Slide 28 of 65 The Federal Reserve System The Federal Reserve System (or Fed) is the central banking organization in the United States. Congress set up the Fed in 1913 to end the periodic financial panics that occurred during the 1800s and early 1900s. The Fed consists of 12 Federal Reserve district banks, 25 branch banks, and about 5,000 member banks

Introduction to Business, Money and Financial Institutions Slide 29 of 65 Functions of the Fed The six functions of the Fed are: Clearing checks Acting as the federal government’s fiscal agent Supervising member banks Regulating the money supply Setting reserve requirements Supplying paper currency