1. Topic 1: Understand the features of legal tender ifs Certificate in Personal Finance (CPF5)

2. Checklist for Topic 1 By the end of this topic, you will be able to: define ‘money’; list and explain the characteristics of money; list and explain what makes money legal; explain what ‘legal tender’ is, including:  what amounts are legal tender; and  the position regarding Scottish and Northern Irish notes and coins; and explain what happens to old and damaged notes. ifs Certificate in Personal Finance (CPF5)

3. What is money? ifs Certificate in Personal Finance (CPF5)

4. What is money? ifs Certificate in Personal Finance (CPF5)

5. What is money? ifs Certificate in Personal Finance (CPF5)

6. What is money? ifs Certificate in Personal Finance (CPF5)

7. Denominations ‘Denomination’ means the different value of each note and coin. In the UK, we have coins in denominations of: £2; £1; 50p; 20p; 10p; 5p; 2p; and 1p. ifs Certificate in Personal Finance (CPF5)

8. Activity 1a Visit http://www.royalmint.com/discover/uk- coins/coin-design-and-specifications and have a look at the designs on the most recent coins in circulation in the UK. http://www.royalmint.com/discover/uk- coins/coin-design-and-specifications a) What image appears when all of the newest coins are arranged in a certain way? ifs Certificate in Personal Finance (CPF5)

9. Activity 1a b) Click on ‘The seven sides of a 50p coin’ on the left of the Royal Mint webpage. What was replaced by the first 50p coin in 1971? c) At http://www.royalmint.com/discover/uk- coins/coin-design-andspecifications, click on the image of the £5 coin. When was the coin first issued? How many issues have there been? Is it legal tender? Where can it be spent? http://www.royalmint.com/discover/uk- coins/coin-design-andspecifications ifs Certificate in Personal Finance (CPF5)

10. Denominations The Bank of England also issues banknotes in the following denominations, featuring the following people: a £5 note shows Elizabeth Fry, prison reformer (a new £5 note is to be launched in 2016 featuring Sir Winston Churchill, former Prime Minister); ifs Certificate in Personal Finance (CPF5)

11. Denominations a £10 note shows Charles Darwin, scientist (a new £10 note is to be launched around 2017, featuring Jane Austen, author; a new design for £20 notes was launched in 2007, which shows Adam Smith, economist; and a £50 note shows Matthew Boulton and James Watt, leading figures of the Industrial Revolution. ifs Certificate in Personal Finance (CPF5)

12. Denominations Every banknote features the pledge ‘I PROMISE TO PAY THE BEARER ON DEMAND THE SUM OF [amount]’, signed by a chief cashier on behalf of the Governor and Company of the Bank of England. This promise is left over from the days when people could take their banknotes to the Bank of England and exchange them for gold to the same value. ifs Certificate in Personal Finance (CPF5)

13. Characteristics of Money ifs Certificate in Personal Finance (CPF5)

14. Characteristics of Money It must be: easily recognised by everyone; accepted by people and shops; easy to carry around; available in different amounts (so that you can buy things of different value and get change); always worth the same amount; and hardwearing (so that it lasts a long time). ifs Certificate in Personal Finance (CPF5)

15. Easily recognised by everyone ifs Certificate in Personal Finance (CPF5)

16. Easily recognised by everyone ifs Certificate in Personal Finance (CPF5)

17. Did you know? ifs Certificate in Personal Finance (CPF5)

18. Activity 1b If you look at the example earlier, in which we changed £200 into US dollars, the bank might take 2 per cent commission on the transaction. ifs Certificate in Personal Finance (CPF5)

19. Using Money in Different Countries When you go to another country, you have to find out what currency is used there. There are three main ways of making sure that you will have the local currency to spend when you arrive: buy notes and coins in that currency; buy travellers’ cheques; and/or use a plastic card while you are abroad. ifs Certificate in Personal Finance (CPF5)

20. Buying Cash ifs Certificate in Personal Finance (CPF5)

21. Buying Cash Holding cash is very flexible, because you can spend it anywhere – but it is not safe to carry too much at once. It is a good idea to keep checking the exchange rate of the currency that you want to buy to see if you can buy it when the exchange rate is lower. In that way, you will get a little more of that country’s currency for your sterling. ifs Certificate in Personal Finance (CPF5)

22. Buying Travellers’ Cheques You can buy special travellers’ cheques, either in sterling, or in a currency such as the euro or the US dollar. They are pieces of paper that are worth specific given amounts, such as £20, £50 or £100. They are issued in your name and each cheque has an individual serial number. When you buy the cheques, you sign them all and you are given a list of the numbers of each one. ifs Certificate in Personal Finance (CPF5)

23. Buying Travellers’ Cheques Once you have arrived at your destination, you can exchange them at a bank or at your hotel for the local currency equivalent of the value of each cheque. You are asked to sign the cheque again and the bank clerk compares your two signatures with each other – to safeguard against anyone else trying to cash your cheques. ifs Certificate in Personal Finance (CPF5)

24. Buying Travellers’ Cheques Although they are not as flexible as holding actual cash that you can spend anywhere, travellers’ cheques are safer, because if you lose them or they are stolen, you can report the numbers of the missing cheques and they will be cancelled. You can then be issued with new cheques and you do not lose your money. ifs Certificate in Personal Finance (CPF5)

25. Buying Travellers’ Cheques If you do not use all of your cheques, you can pay them back into your bank account when you come home or you can change them into sterling. ifs Certificate in Personal Finance (CPF5)

26. Where To Exchange Money Abroad When you arrive in a different country, you may need to change some money. You can usually do this at the reception desk of the hotel at which you are staying, but it might not give you the best exchange rate. It is usually better to find a bank or a foreign exchange office. ifs Certificate in Personal Finance (CPF5)

27. Bureau de Change ifs Certificate in Personal Finance (CPF5)

28. Did you know? ifs Certificate in Personal Finance (CPF5)

29. Changes In Variable Exchange Rates ifs Certificate in Personal Finance (CPF5)

30. Activity 8d ifs Certificate in Personal Finance (CPF5) You are in Houston, Texas, and have £80 in cash that you want to exchange for US dollars. You look around and see a bank that is displaying the following notice: We buy £ at US$1.75 Just down the street, you see a bureau de change. Its notice says: We buy £ at US$1.71

31. Activity 8d ifs Certificate in Personal Finance (CPF5) a)Which should you choose? Demonstrate your reasoning with a calculation. b)Try the same calculations with £8,000 – a figure for which the choice will really matter.

32. Activity 8d ifs Certificate in Personal Finance (CPF5) a)You possibly saw that, for every £1, the bank was going to give you US$1.75 and the bureau de change was going to give you US$1.71. So the bank would give you more. There is not a big difference when we are looking at £80, but if you were to have a lot more money it could matter.

33. Activity 8d ifs Certificate in Personal Finance (CPF5) The difference is: £80 x 1.75 = US$140 £80 x 1.71 = US$136.80 US$140 – US$136.80 = US$3.20

34. Activity 8d ifs Certificate in Personal Finance (CPF5) b) From the bank, you would get: £8,000 x 1.75 = US$14,000 From the bureau de change, you would get: £8,000 x 1.71 = US$13,680 The difference is: US$14,000 – US$13,680 = US$320 That is certainly enough to make it worthwhile shopping around for the best rate.

35. Did you know? ifs Certificate in Personal Finance (CPF5) Notice that if you were to have bought your dollars in the UK before you went to Texas, you would be going into a UK bank and asking at what rate it will sell dollars to you. You would be looking for the ‘sell rate’ for dollars.

36. Did you know? ifs Certificate in Personal Finance (CPF5) In this example, you are in the USA, trying to get the US bank to buy your sterling from you in exchange for some dollars. So you will be looking at the ‘buy rate’ for sterling.

37. Activity 8e ifs Certificate in Personal Finance (CPF5) William has saved £100 for his holiday in Spain and he needs to buy euros. He looks in the newspaper and sees that the exchange rate is £1 = €1.16. a)How much will he get for his £100?

38. Activity 8e ifs Certificate in Personal Finance (CPF5) A few days later, William goes to the Post Office to change his sterling into euros and he is given €120. He asks the clerk if she has made a mistake and she tells him that the pound has gone up against the euro and that the price is now £1 = €1.20. (In other words, sterling has strengthened and is now worth €1.20 instead of €1.16.) He has gained €4.

39. Activity 8e ifs Certificate in Personal Finance (CPF5) At the end of his holiday, William has €12 left and, when he gets back to the UK, he wants to change the euros back into sterling. b) If William expects to get £10 for the €12, what must he expect the exchange rate to be?

40. Activity 8e ifs Certificate in Personal Finance (CPF5) When he goes to the Post Office, the clerk tells William that sterling has gone up again to £1 = €1.30. c) How much does she gives him in exchange for his leftover €12?

41. Activity 8e ifs Certificate in Personal Finance (CPF5) a)£100 x 1.16 = €116 (William will get €116 for his £100.) b)€12 ÷ £10 = 1.20 (William expects the exchange rate to be 1.20.) c)€12 ÷ 1.30 = £9.23 (William will get £9.23 for his €12.)

42. Exchange Rate Risk ifs Certificate in Personal Finance (CPF5)

43. Exchange Rate Risk ifs Certificate in Personal Finance (CPF5)

44. Exchange Rate Risk ifs Certificate in Personal Finance (CPF5)

45. Activity 8f ifs Certificate in Personal Finance (CPF5) Dylan and his friends are planning to go to Ibiza. They want to go clubbing three nights during the holiday. They have been told that the cost of club entry is €50 per night, so Dylan goes to his bank and changes enough money into euros to pay for his club entry.

46. Activity 8f ifs Certificate in Personal Finance (CPF5) a)Calculate for Dylan the cost of €150, using an exchange rate of 1.20. Solution a)€150 ÷ 1.20 = £125 (Club entry will cost Dylan £125.)

47. Activity 8f ifs Certificate in Personal Finance (CPF5) Dylan also gets £125 worth of travellers’ cheques to take with him. When he gets to Ibiza, he changes his travellers’ cheques and finds that the rate is £1 = €1.14. b) How much does Dylan get in euros?

48. Activity 8f ifs Certificate in Personal Finance (CPF5) b) £125 x 1.14 = £142.50 Dylan might expect to get closer to €150 for his £125 because that is what his club entry worked out at – but because he changed his money in Ibiza (by cashing his travellers’ cheques after he arrived) and the exchange rate was not as good, he got less than he expected.

49. Activity 8f ifs Certificate in Personal Finance (CPF5) The shortfall in activity 8f is an example of ‘exchange rate risk’ – that is, the possibility that the cost of something bought abroad might increase as a result of changes in exchange rates.

50. Question ifs Certificate in Personal Finance (CPF5) Dylan will think that this is annoying and he may change his plans – but do you think that there is anything that he might have done to prevent it?

51. Question ifs Certificate in Personal Finance (CPF5) Can you think of an event that might mean that Dylan will have more money to spend? Exchange rate risk is more important if the item to be bought is expensive.

52. Activity 8g ifs Certificate in Personal Finance (CPF5) Dylan’s parents like Spain so much that they have decided to buy a holiday home there. The cost is €100,000 and it has to be paid in three months’ time. Dylan is worried that the same thing might happen to his parents as happened to him and that the property might end up being more expensive.

53. Activity 8g ifs Certificate in Personal Finance (CPF5) a) Work out how many pounds sterling the villa will cost if the exchange rate is £1 = €1.21. Then work out how many pounds sterling the villa will cost if the exchange rate is £1 = €1.13. What is the difference between the two?

54. Activity 8g ifs Certificate in Personal Finance (CPF5) a) The difference is £5,851: €100,000 ÷ 1.21 = £82,645 €100,000 ÷ 1.13 = £88,496

55. Activity 8g ifs Certificate in Personal Finance (CPF5) b) Is Dylan right to be worried? b) This is a lot of money, so Dylan is definitely right to be worried.

56. Special Exchange Rates ifs Certificate in Personal Finance (CPF5) Using a special exchange rate is one way in which we can remove exchange rate risk. Businesses use this method a lot if they are buying and selling overseas.

57. Case Study 8 ifs Certificate in Personal Finance (CPF5) Dylan’s parents can go to their bank and arrange a special exchange rate to buy €100,000 in three months’ time. The rate may not be as good as the current rate of £1 = €1.11, but it will mean that they have a guaranteed rate and that they can do all of their sums knowing what the exchange rate is.

58. Using A Plastic Card Abroad ifs Certificate in Personal Finance (CPF5) Debit card You can use your debit card abroad at automated teller machines (ATMs), and in shops and hotels. You will need to match up the symbol on your card with the ATM or the information in the shop. The symbols to look out for are Cirrus, MasterCard or Visa.

59. Using A Plastic Card Abroad ifs Certificate in Personal Finance (CPF5) Debit card You can use your debit card abroad at automated teller machines (ATMs), and in shops and hotels. You will need to match up the symbol on your card with the ATM or the information in the shop. The symbols to look out for are Cirrus, MasterCard or Visa.

60. Using A Plastic Card Abroad ifs Certificate in Personal Finance (CPF5) Debit card You will use the card with your personal identification number (PIN), just as you would in the UK. The amount that you spend will be converted into sterling when it is debited to your bank account.

61. Using A Plastic Card Abroad ifs Certificate in Personal Finance (CPF5) Credit Card If you have a credit card, you can use anywhere showing the symbols for MasterCard or Visa. You will use it in the same way as you would use the card in the UK.

62. Using A Plastic Card Abroad ifs Certificate in Personal Finance (CPF5) Credit Card Any amounts that you spend will be included in your next credit card statement. The amount in currency will have been converted into sterling by the credit card company.

63. Using A Plastic Card Abroad ifs Certificate in Personal Finance (CPF5) Prepaid cash card A prepaid cash card is a card that is pre- loaded with cash and then used to withdraw the money at an ATM or to make purchases. Once all of the pre-loaded money has been spent or withdrawn, the card cannot be used again until more money is loaded onto it.

64. Using A Plastic Card Abroad ifs Certificate in Personal Finance (CPF5) Prepaid cash card Prepaid cash cards are a good idea for holidays, meaning that you do not have to carry currency around. They are also useful for people who tend to overspend or get otherwise carried away while shopping.