Chapter 10: understanding money and banking
Money- any object generally accepted by people as payment for goods and services.
Chartered bank- a privately owned, profit seeking firm that serves individuals, non business
organizations, and businesses as a financial intermediary
Trust services- the management of funds left “in the banks trust”
Letter of credit- a promise by a bank to pay money to a business firm if certain conditions are
Bankers acceptance- a promise that the bank will pay a specified amount of money at a later
Chequable deposit- a chequing account.
Term deposit- money that remains with the bank for a period of time with interest paid to the
Prime rate of interest- lowest rate of interest charged to borrowers.
Reserve requirement- the requirement (until ’91) that banks keep a portion of their chequable
deposits in vault cash or as deposits with the bank of Canada.
Electronic funds transfer- a financial service that combines computer and communication
technology to transfer funds into, from, with and among financial institutions.
Debit card- a plastic card that immediately on use reduces the balance in the users bank
account and transfers it to the stores account.
Smart card- a credit card sized plastic card with an embedded computer chip that can be
programmed with “electronic money”
Ecash- money that moves among consumers and businesses via digital electronic transmissions.
Life insurance company- a mutual or stock company that shares risk with its policy holders for
payment of premiums.
Factoring company- buys accounts recievable from a firm for less than their face value and then
collects the face value of their receivables.
Sales finance company- specializes in financing installment purchases made by individuals or
Customer finance company- makes personal loans to consumers.
Venture capital firm- provides funds to new or expanding firms thought to have significant
Pension fund- accumulates money that will be paid out to subscribers in the future.
Trust company- safeguards funds and estates entrusted to it; may also serve as trustee, transfer
agent, and registrar for corporations.
Credit union- co-operative savings and lending associations formed by a group with common
Law of one price- the principle that identical products should sell for the same price in all
countries. Chapter Notes
The characteristics of money
Portability- be small, lightweight and easy to handle. As opposed to old forms of currency where
raw materials (ex: fish, arrows and livestock) where used.
Divisibility- make it easy to match units of money with the value of all goods. 1 dollar can be
exchanged for 10 dimes, 4 quarters etc.
Durability- it does not die or spoil easily and it can be replaced.
Stability- raw materials used as currency have different values according to what time of year it
is. Paper money does fluctuate according to the market, but overall it is much more stable.
The functions of money
Medium of exchange- we use money as a way of buying and selling things. Without it, we would
have to barter in order to make transactions.
Store of value- currency does not lose its value after it is printed, it will always be valued the
same, unlike raw materials that can go bad over time.
Unit of account- money lets us measure the relative value of something without necessarily
inquiring about the actual price. Ex: we all know a laptop costs 500 dollars or more.
Credit cards: plastic money?
Plastic money is a term now coined to describe a credit card.
Credit cards are NOT money, they are a money substitute. They serve as a temporary medium of
Are big in business because (1) they are convenient and (2) they are extremely profitable for the
issuing companies. The profits derive from two sources:
1. Some cards charge annual fees to holders. All charge interest on unpaid balances (11-
2. Merchants who accept credit cards pay fees to card companies (2-5% of total sale
The main function of financial institutions is to ease the flow of money from sectors running a
surplus to those with deficits.
For many years the financial community in Canada was divided into 4 “financial pillars” (1)
chartered banks (2) investment dealers (3) life insurance companies and other specialized
lending and saving intermediaries (4) alternate banks.
The crumbling of the financial pillars began in 1980 and was accelerated in 1987-1992 due to
ongoing changes in the bank act.
The differences across the four divisions now are very blurred. Financial pillar #1: chartered banks
A privately owned, profit seeking firm that serves individuals, non business organizations and
businesses as a financial intermediary.
They offer chequing and savings accounts, give loans and provide many other services.
The largest and most important financial institutions in Canada.
Canada has a branch banking system. This means there are a few large banks with hundreds of
branches. The US has hundreds of banks with few branches.
Services offered by banks
A highly competitive industry. Banks no longer just do withdraws and deposits. Most banks now
have their own bank-issued credit cards. Other services are listed below.
1. Pension services- banks serve as intermediaries by receiving funds and investing them as
directed by the customer.
2. Trust services- the management of funds left in the banks trust. You can tell them to pay
your monthly bill and manage investment portfolios.