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FUNCTION OF MONEY

Unit 3 – The individual as producer, consumer and borrower. FUNCTION OF MONEY. TYPE OF EXCHANGE SYSTEM. BARTER TRADE - Exchanging of goods and services. - Required double coincidence of wants to be fair. - Rate of exchange can vary based on what the parties feel their goods is worth.

kenneth-garza
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FUNCTION OF MONEY

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  1. Unit 3 – The individual as producer, consumer and borrower FUNCTION OF MONEY

  2. TYPE OF EXCHANGE SYSTEM BARTER TRADE - Exchanging of goods and services -Required double coincidence of wants to be fair. - Rate of exchange can vary based on what the parties feel their goods is worth. - Saving is also hard it is hard to save in terms of bulk items like wood or apples etc.

  3. TYPE OF EXCHANGE SYSTEM Function of Money 1. Money is a medium exchange As a item that is acceptable by all. As such it can facilitate exchange of goods and services.

  4. TYPE OF EXCHANGE SYSTEM Function of Money 2. Money is a measure of value as it can be use to represent the value of goods and services.

  5. TYPE OF EXCHANGE SYSTEM Function of Money 3. Store of value. Unlike storing goods as value, money use little space to store. With technology, money is represented as a number in a computer or in cyberspace. (As in bank accounts)

  6. TYPE OF EXCHANGE SYSTEM Function of Money 4. As a means of differed payment. -In the business world, many companies give allow consumers to buy on credit (buy now and later pay over a period time). -Banks allow customers to borrow to buy properties and payment will be by monthly instalments.

  7. HISTORY OF MONEY KISSIE MONEY (AFRICA) metal iron SPADE MONEY (CHINA) COWRIE (PACIFIC NATIONS) SHOE MONEY (CHINA) METAL COINS (the rise of the Jewish Rothchilds 15th centuary)

  8. What Makes Good Money (pg.108 – 109 of Moynihan) It must be acceptable It must be durable It must be portable It must be divisible It must not be in abundance (ie. Must have some degree of scarcity)

  9. Teaser 1 • A bank lends a sum of money at 6% for 10 year to a • customer. As time passes over the 10 years, the prices of every goods and and services increases by 20% (this is called inflation). • With money as a means of deferred payment, who benefits at the end of the 10 years. • Explain your answer in question 1 in terms of the stored value of money. To Submit: Queenie, Joaquim, Catherine, Darren, Jamie, Claudia Tan Presenter: HSBC

  10. What is Money 1. Money is a medium of exchange 2. Money is a store of value Because of the 2 characteristic of money above, our savings in banks and other financial institutions can be classified as money which can be quickly converted in exchange for goods and services.

  11. The Money Supply The money supply in an economy consist of the money circulating in the economy plus the money (notes and coins) deposited in the banks. But are coin and notes the only appropriate form of money?

  12. Other Assets That Can Act as Money? • Jewelry, Painting, Antiques? Not easy to liquidate in exchange for goods and services. Value is based on opinion of professionals and not generally agreed nor accepted by all. • If one holds government bonds, it is easy to sell in exchange for cash but that depends on its price it will fetch in the money market. Also it has a maturity date and cannot get full value until maturity.

  13. Other Assets That Can Act as Money? - Bank Deposits – Time Deposits (1mth, 3mths, 6mths, 1year etc) are difficult to convert to cash as it involves a penalty to the depositor if they tried withdraw cash before the date of maturity. - Saving accounts – Easier to withdraw in exchange for goods and services. No penalty.

  14. The Money Market A market place that exist for those who have money to lend money to those that need it. The act of arranging loans or borrowing is called financial intermediation. Mostly dominated by banks and is the work of the banks’s treasury division where banks dealers borrow and lend money to other banks, financial institutions and big corporations which have treasury divisions. Minimum average loan and borrowing size is around $10 million.

  15. What is A Bank It’s a financial intermediary. Its main function is to borrow cheap and lend high.

  16. How The Bank Functions 1. Making Loans OCBC banks obtained a request from Singapore International Airlines which requires $10 million overdraft over 1 year to pay for renovation of one of their hangers that houses the Boeing 777 planes. Step 1:OCBC goes into the money market and calls up a few banks to get the best rate. It gets lowest rate from Mitsui Bank for $10 million at 2% for 1 year loan.

  17. How The Bank Functions 1. Making Loans OCBC banks obtained a request from Singapore International Airlines which requires $50 million overdraft over 1 year to pay for renovation of one of their hangers that houses the Boeing 777 planes. Step 2:OCBC goes back to SIA and informs the Vice President of Finance that the borrowing rate for the overdraft of US$10 for 1 year is 2.25% to which the VP agrees.

  18. How The Bank Functions 1. Making Loans OCBC banks obtained a request from Singapore International Airlines which requires $50 million overdraft over 1 year to pay for renovation of one of their hangers that houses the Boeing 777 planes. Step 3:OCBC draws up the overdraft contract to borrow from Mitsui and lends to SIA. In the process, OCBC makes 0.25% profit (2.25 – 2.00). In terms of money profit made, it would be 0.25/100 X US$10 million = $250,000. (not bad considering that the OCBC dealer merely picked up the phone and intermediated between Mitsui and SIA)

  19. How The Bank Functions 2. Other bank Services – Charging a Fee 1.Withdrawal from ATM (while holidaying in other countries. 2. Exchanging foreign currencies. 3. Internet Banking 4. Organizing electronic transfer of funds to other countries, Bankers guarantee. 5. Issuing debit and credit cards 6. Providing letters of credit so that trade between parties can take place.

  20. The Central Bank • Function of a Central Bank • It issues currency for the nation. • It manages the payment to and from the government. (incorrect as per Moynihan pg.119. This is the role of the ministry of finance) • It manages the national debt (Moynihan pg119, incorrect as this is also a function of the MOF) • Supervises the banking system like the amount of cash reserves to be kept by banks. • Lender of last resort to all commercial banks. • Manages the reserves of the country. • Operates the monetary policy of the country. (policy to help the country out of a economic recession or to bring down inflation)

  21. Teaser 2 • The following questions concern the central bank and commercial banks: • What are the differences in their function. • What services do they provide and to whom. • How are they organized and controlled. • 4. Of what importance are they to the economy. To Answer CIMB ABC CITIBANK Rothschild

  22. The Stock Market A stock refers to money that is raised by a joint stock company (a company with many shareholders), a corporation or the government (government bonds).

  23. Who Owns a Company? A company is owned by people who hold shares or equity of the company. These equity are also referred to as stocks. Because there are many people who own shares in a company, we call this joint stock meaning that the company is jointly owned by many shareholders.

  24. What Benefits in Financial Terms Is there for Shareholders Whenever a company is profitable and makes profits, it will share some of this profits to the shareholders through a dividend. However, this share of dividend is different for differ classes of shareholders: - Preferred Stock shareholders – They will get to have dividend paid to them first before other forms of shareholders (like the common stock shareholders). Their dividend is often a fixed percentage of the value of the nominal value of the share. These shares however do not carry voting rights. - Common stock shareholders – They will be paid the left over dividend after having paid the preferred shareholders first. This could sometimes mean very little or nothing left for common stock shareholders. They however, have voting rights and can vote out the members in the board of directors.

  25. What do companies do in the stock market? -Companies try to raise funds to further their operations in a stock market. -Each time they do this they go to the stock market to float their shares. A stock market consist of buyers and seller of stocks and shares. Whoever buys a share of the company gets to own a smaller portion of the Company. -Once money is raised, the funds will go to the permanent or what is called the paid up capital of the company. IT IS NOT EASY TO RAISE FUNDS ON A STOCK EXCHANGE AS THERE ARE MANY PRE-LISTING OR FLOATATION CONDITIONS THAT HAS TO BE MET PRIOR FLOATION.

  26. Government Stocks Government Stocks are not in the form of equity or shares. It is in the form of government bonds and treasury bill (bills are are form of government bonds but with a loan period of less than 1 year). Nobody private individual or corporation can own a government, as such governments do not issue shares. This is a 10 year US Gov. Bond that pays 4% per annum on $10,000. The holder gets back $10,000 at the end of the 10th year.

  27. Function of A Stock Exchange

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