Presentation on theme: "Chapter 12 Money and Financial Institutions"— Presentation transcript:
1 Chapter 12 Money and Financial Institutions Business Principles Fall 2009
2 Something to Think About… Think about how bartering, or trading goods and services, might work in your life.
3 Essential Questions What are some ways you currently use a bank? How might your dealings with a bank expand or change in the future?Why do you think it is important to use a bank?
4 Objectives Describe the functions and characteristics of money. Discuss three main functions of a bank.Compare and contrast three types of banks that are found in our economy.Explain the major functions of the Federal Reserve System in the U.S. Economy.
5 The Purpose of MoneyMoney allows people and businesses to buy and sell goods around the world.Money is a standard of value and a means of exchange or payment.It can be anything people will accept as a payment.In the past people used shells, stones, corn, parrot feathers, gopher tails for money
6 The Purpose of MoneyToday we use coins, currency, checks, and debits cards.This is our monetary system.Goods and services are directly exchanged using money.
7 Functions of MoneyYou want to go buy your favorite product, but you don’t have any money to buy it.What would you have to do in order to get that favorite product?
8 Functions of Money Money has three basic functions: Medium of exchange: anything generally accepted as a measure of value and of wealthStandard of Value: a way to measure the weight, amount, size, or value of somethingStore of Value: it holds its value over time and can be stored or saved
9 Characteristics of Money Must be stable in valueMust be scarceMust be acceptedShould be divisible into partsHas to be portable and durableMust be hard to counterfeitStable: Has little if any change in valueScarce: If the supply of an item is overly plentiful, it loses its value and cannot serve as money or a store of value since it would have little worth.Accepted: People have to be willing to take money in exchange for goods and servicesCounterfeit: means to make a copy of something in order to defraud or deceive people.
10 The Functions of BanksFinancial Institution is a firm that manages money.Banks are the main type of financial institutionThey offer a variety of financial servicesHelp other businesses and consumers manager their money
11 Storing MoneyStoring money means to place or leave it for preservation or later use.Bank account is used to keep a record of the amount of money that has been deposited or withdrawn from a bankDeposit: Money put in a bank accountWithdrawal: money taken outKeeping your money in a bank prevents you from losing it, spending it, or having it stolen
12 Bank Accounts Checking Account Saving Account Short term storage Banks charge a feeSaving AccountLong term storageIt earns more interestInterest: a rate that the bank pays customers for keeping their moneyIf a bank pays you 5 percent interest per year on a $1,000 savings account, you’ll have earned $50 after one year.
13 Transferring MoneyBanks use checks and electronic funds transfers to move money.Checks transfer money from one party to anotherEFT allows money to transfer from one bank to another through a networkDirect DepositDirect Deposit: electronic transfer of a payment directly from the payer’s bank account to that of the party being paid. Payroll is a good example
14 Lending MoneyThe money you deposit in a bank make it possible for the bank to lend to other customersCustomers must pay interest on the money they borrow from banksMost banks require some form of collateralCollateral: property or goods pledged by a borrower to use as security against a loan it it is not repaid
15 Types of Loans Mortgage Loan Commercial Loan Individual Loan Used to buy real estateCommercial LoanMade to businessesIndividual LoanMade to individualsLine of CreditLend money to be used at any timeMortgage: agreement in which a borrower gives a lender the right to take the property if the loan is not repaidCommercial: Buy supplies and equipmentIndividual: Personal Items….cars, home repairs, vacations
16 Other Financial Services Many banks provide advice on managing and investing money.You can also store valuable items, jewelry and birth certificates, in a safe-deposit box.Banks offer debit and credit cardsThey also have a trust department that manages money
17 Exit TicketWhat is a major advantage of using money over bartering in buying goods and services?What are the characteristics that money must have?What are the four types of loans that a bank makes?Why do you think it is important to use a bank?
18 Financial Institutions Banks operate on state, national, and international levelsThere are strict rules to start a bankThe owner must apply for a charter from the government
19 Financial Institutions The three main types of banks are:Commercial banksSavings and loan associationsCredit unions
20 Commercial BanksThese makeup the majority of banks in the United States.Offer wide range of banking services, checking, savings, loans, and financial adviceCalled full-service banks
21 Commercial Banks Serve individual and businesses They charge more interest on money they lend than the money they pay on savings accounts to earn a PROFIT.
22 Savings and Loan Associations Financial institutions that hold customers’ funds in interest-bearing accounts and invest mainly in mortgage loansOriginally, their purpose was to encourage people to save money and make it easier to buy a home
23 Savings and Loan Associations In the 1980s, about 20% of savings and loan associations failedNew regulations were passed allowing them to charge higher interest rates and offer more services.
24 Credit UnionsNot-for-profit banks set up by organizations for their customers to use.Credit unions offer credit cards, checking accounts, low-interest loans, and high interest savings accounts
25 Other Financial Institutions Mortgage CompaniesProvide loans for buying a home or businessFinance CompaniesShort-term loans to businesses and consumersInsurance CompaniesProvide protection against problems and also offer loans to businessesBrokerage FirmsSell stock and bonds and also offer a wide range of financial services.
26 The Federal Reserve System Central Bank of the United StatesIt is the banker’s bankThey monitor the money supplyThere are 12 Federal Reserve Districts, 25 Branch Banks, and 5,000 member banks
27 The Federal Reserve System It’s mission is to:Provide the United States with a safe, flexible, and stable monetary and financial systemRun by a board of directors
28 The Federal Reserve System It has six functions:Clearing ChecksActing as the Federal Government’s Fiscal AgentSupervising Member BanksRegulating the Money SupplySetting Reserve RequirementsSupplying Paper Currency
29 AssignmentName the headquarters of the 12 Federal Reserve district banks across the United StatesFind an example of each in the United States:Commercial Bank, Savings and Loan Association, Credit Union, Mortgage Companies, Finance Companies, Insurance Companies, and Brokerage Firms