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Chapter 8-Understanding Money and Banking

Management (MGT)
Course Code
H Laurence

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Chapter 8: Understanding Money and Banking
What Is Money
The Characteristics of Money
Money - Any object generally accepted by people as payment for goods and services
- Portability - lightweight and easy to handle
- Divisibility - can be easily broken down to smaller units
- Durability - does not spoil, die or wear out; can be replaced with new coins and paper money
- Stability - stability of the value of the currency
Functions of Money
- Barter economy - goods are exchanged directly for one another
- Medium of Exchange
- Store of Value - can be stored for future purchases
- Unit of Account - measure the relative value of goods ($1,000 dollars worth of clothes)
Credit Cards: Plastic Money?
- Do not qualify as money; they are a money substitute - serve as temporary medium of exchange
- Profitable: - interest on unpaid balances (11% to 20%)
- Merchants who accept credit cards pay fees to card issuers (2% to 5%)
The Canadian Financial System
- The main function of a financial institution is to ease the flow of money from sectors with surpluses to those with
- by issuing claims against themselves and using the proceeds to buy the assets of - and invest in - other organizations
- divided into 4 distinct legal areas called the "four financial pillars"
- Chartered Banks
- Alternate banks (Trust companies, caisses populaires, or credit unions)
- Life insurance companies and other specialized lending and saving intermediaries
- Investment dealers
Financial Pillar #1: Chartered Banks
Chartered Bank - A privately owned, profit-seeking firm that serves individuals, non-business organizations, and
businesses as a financial intermediary
- Offer chequing and saving accounts, make loans, and provide other services
- Schedule A banks - Canadian-owned, and has no more than 10% of voting shares controlled by a single interest
- Schedule B banks - May be either domestically owned that do not meet the 10% limit or foreign controlled
Services Offered by Banks
Pension Services
- establish savings plans for retirement
- serve as intermediaries by receiving funds and investing them as directed by customers
- provide customers with information on investment possibilities
Trust Services - The management of funds left "in the bank's trust"
- In return for a fee, the trust department will perform tasks as making your monthly bill payments and
managing your investment portfolio.
- Also manage the estates of deceased persons
International Services
- Currency exchange
- Letter of Credit - A promise by a bank to pay money to a business firm if certain conditions are met
- Banker's Acceptance - A promise that the bank will pay a specified amount of money at a future date
Financial Advice
- Depending on customer's situation, bank may recommend different investment opportunities
- recommended mix might include guaranteed investment certificates, mutual funds, stocks, and bonds
Automated Teller Machines (ATMs)
- Allows withdrawals 24/7, transfer funds between accounts and provide information on account status
Bank Deposits
Chequable Deposit - A chequing account
Term Deposit - Money that remains with the bank for a period of time with interest paid to the depositor
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