MGTA02H3 Lecture : Chapter 8-Understanding Money and Banking
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
deficits.
- 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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Document Summary
Interest on unpaid balances (11% to 20%) Merchants who accept credit cards pay fees to card issuers (2% to 5%) Store of value - can be stored for future purchases. Unit of account - measure the relative value of goods (,000 dollars worth of clothes) Alternate banks (trust companies, caisses populaires, or credit unions) Life insurance companies and other specialized lending and saving intermediaries. 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. Money - any object generally accepted by people as payment for goods and services. Barter economy - goods are exchanged directly for one another. Do not qualify as money; they are a money substitute - serve as temporary medium of exchange.
