introduction to business chapter 15 money and the financial system ppt

1. Money and the
Financial system
Chapter 15

2. Members of the group
No Names of the group
1 Abdisalan saed jamac
2 Hassan abdi muude
3 Mohamoud abdi haddi
4 Abdirahman jamac cawad
5 Saynab Mohamed adan
6 Khalid abdi ali
7 Hamze abdisalan abdilahi

3. Learning objectives
 After reading this chapter, you will be able to:
 Define money, its functions, and its characteristics
 Describe various types of money.
 Compare and contrast commercial banks, savings and loan
associations, credit unions, and mutual savings banks.
 Distinguish among nonbanking institutions such as insurance
companies, pension funds, mutual funds, and finance companies.

4. What is the money?
 anything generally accepted in exchange for goods and
services.
 Materials as diverse as salt, cattle, fish, rocks, shells, cloth,
as well as precious metals such as gold, silver, and copper
have long been used by various cultures as money.
 Finance
 Is The study of money—how it’s made, how it’s lost
and how it’s managed

5. Functions of money
 there are three important functions of money:
 medium of exchange,
 measure of value
 store of value.

6. Cont..
 medium of exchange
 Money's most important function is as a medium of exchange
to facilitate transactions.
 Without money, all transactions would have to be conducted
by barter, which involves direct exchange of one good or
service for another.
 Medium of exchange, which means that money acts as an
intermediary between the buyer and the seller.

7. Cont…
 measure of value
 Is the function of money that enables the values of different goods
and services to be compared.
 Assume a country’s money is copper. I may agree to trade Joe
two pounds of copper for a cow even if I do not need any copper
because I know I can trade copper with anyone else in the
community.
 Everything in the community would be measured against copper.
Perhaps a pig is worth one pound of copper.

8. Cont…
 store of value.
 A store of value is an asset that maintains its value without
depreciating.
 Gold and other metals are good stores of value as their shelf lives
are essentially perpetual, whereas a perishable good (e.g., milk) is
a poor store of value due to its propensity to decay.
 A store of value is something that people use to transfer
purchasing power from the present to the future.

9. Characteristics of money
 To be used as a medium of exchange, money must be
 Acceptable
 divisible
 portable
 Stable
 Durable.
 Difficulty to Counterfeit.

10. Cont…
 acceptability
 To be effective, money must be readily acceptable for the
purchase of goods and services and for the settlement of
debts.
 Acceptability is probably the most important characteristic of
money.
 This shows the confidence people have in money.

11. Cont…
 Divisibility
 Money must be capable of being divided into smaller units,
e.g. ($100, $50, $20, $10, etc., to enable it to purchase both
high and low priced commodities.
 With barter, the lack of divisibility often makes otherwise
preferable trades impossible, as would be an attempt to trade
a steer for a loaf of bread.

12. Cont…
 portability
 it must be easily moved from one location to the next.
 Means is that money must be able to go wherever such that it
is easy to transport as people travel.
 The object that serves as money must be something that can
easily be carried about from one place to another.

13. Cont…
 Stability
 Money must be stable and maintain its declared face value.
 A $10 bill should purchase the same amount of goods or
services from one day to the next.
 The principle of stability allows people who wish to postpone
purchases and save their money to do so without fear that it
will decline in value.

14. Cont…
 Durability.
 Money must be durable.
 Durability of money is such that it can be used over and over
again; hence it must survive wear and tear for long periods.
 The object that will serve as money must be able to long
term.

15. Cont…
 Difficulty to Counterfeit.
 Finally, to remain stable and enjoy universal acceptance, it
almost goes without saying that money must be very difficult
to counterfeit—that is, to duplicate illegally.
 Every country takes steps to make counterfeiting difficult.
 Most use multicolored money, and many use specially
watermarked papers that are virtually impossible to duplicate.

16. Types of Money
 Generally There are two types of money paper money and
coin money
 Checking account
 Saving account
 Money market account
 Certificates of deposit
 Credit card
 Debit card

17. Cont…
 Checking account
 money stored in an account at a bank or other financial
institution that can be withdrawn without advance notice; also
called a demand deposit
 savings accounts
 accounts with funds that usually cannot be withdrawn without
advance notice; also known as time deposits

18. Checking account

19. Cont…
 money market accounts
 accounts that offer higher interest rates than standard bank
rates but with greater restrictions
 certificates of deposit (CDs)
 savings accounts that guarantee a depositor a set interest
rate over a specified interval as long as the funds are not
withdrawn before the end of the period—six months or one
year, for example

20. Cont…
 credit cards
 means of access to preapproved lines of credit granted by a
bank or finance company
 debit card
 a card that looks like a credit card but works like a check;
using it results in a direct, immediate, electronic payment
from the cardholder’s checking account to a merchant or third
party

21. Banking institution
 Banking institutions accept money deposits from and make
loans to individual consumers and businesses.
 Some of the most important banking institutions include:
 commercial banks,
 savings and loan associations
 credit unions
 mutual savings banks.

22. Cont…
 commercial banks
 the largest and oldest of all financial institutions, relying
mainly on checking and savings accounts as sources of
funds for loans to businesses and individuals
 savings and loan associations (S&Ls)
 financial institutions that primarily offer savings accounts and
make long-term loans for residential mortgages; also called
“thrifts”

23. Cont…
 credit union
 a financial institution owned and controlled by its depositors,
who usually have a common employer, profession, trade
group, or religion.
 mutual savings banks
 financial institutions that are similar to savings and loan
associations but, like credit unions, are owned by their
depositors.

24. Nonbanking institution
 Nonbank financial institutions offer some financial services,
such as short-term loans or investment products, but do not
accept deposits.
 These include
 insurance companies,
 pension funds,
 mutual funds,

25. Cont…
 brokerage firms,
 nonfinancial firms
 finance companies.

26. Cont…
 insurance companies
 businesses that protect their clients against financial losses
from certain specified risks (death, accident, and theft,
for example) in exchange for a fee, called a premium.
 insurance companies generally have large amounts of
excess funds.
 They typically invest these or make long-term loans,
particularly to businesses in the form of commercial real
estate loans.

27. Cont…
 pension funds
 managed investment pools set aside by individuals,
corporations, unions, and some nonprofit organizations to
provide retirement income for members
 One type of pension fund is the individual retirement account
(IRA), which is established by individuals to provide for their
personal retirement needs.

28. Cont…
 mutual fund
 an investment company that pools individual investor dollars
and invests them in large numbers of welldiversified
securities
 brokerage firms
 firms that buy and sell stocks, bonds, and other securities for
their customers and provide other financial services

29. Cont…
 finance companies
 businesses that offer short-term loans at substantially higher
rates of interest than banks
 Commercial finance companies make loans to businesses,
requiring their borrowers to pledge assets such as
equipment, inventories, or unpaid accounts as collateral for
the loans.

30. END