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University of Toronto Scarborough
Management (MGT)
Bill Mc Conkey

MANAGEMENT II CHAPTER 10 – UNDERSTANDING MONEY AND BANKING WHAT IS MONEY?  Taken together, the value of everything you own is your personal wealth o Not all of it is money  Value of money fluctuates -> Affects the country and its citizens THE CHARACTERSTICS OF MONEY  Celts -> Ancient Ireland o Cow was the unit of exchange  Any object can serve as money: Any object generally accepted by people as payment for goods and services – if it is portable, divisible, durable, and stable THE FUNCTIONS OF MONEY  Barter Economy: One in which goods are exchanged directly for one another o Need to find someone who needs the item, and willing to exchange the wanted good for it o Inefficient  Still used by various places around the world -> Russia  Money Economy: Sell goods and services for money Three Functions Served by Money  Medium of Exchange: Use money as a way of buying and selling things  Store of Value: Money can be used for future purposes -> Stores value  Unit of Account: Money lets us measure the relative values of goods and services o All products can be valued and accounted for in terms of money CREDIT CARDS: PLASTIC MONEY?  Credit has become a major factor in the purchase of consumer goods in Canada  Credit cards referred to as “plastic money”  Credit cards do not actually qualify as money o Money Substitute: They serve as a temporary medium of exchange but are not a store of value  Reasons they are big business o Convenient o Profitable for issuing company  Charge annual fees to holders  Charge interest on unpaid balances (11-20%)  Merchants who accept credit cards pay fees to card issuers THE CANADIAN FINANCIAL SYSTEM  Many forms of money depend on the existence of financial institutions to provide a road spectrum of services to both individuals and businesses FINANCIAL INSTITUTIONS  Main function -> Ease the flow of money from sectors with surpluses to those with deficits o Issuing claims against themselves and using the proceeds to buy the assets of (invest) other organizations  Financial community in Canada was divided into four legal areas (Used to be distinctly different) o Chartered Banks o Investment Dealers o Life Insurance Companies (Other specialized lending and saving intermediaries o Alternate Banks 1 | P a g e MANAGEMENT II THE 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 savings accounts, make loans, and provide many other services to their customers  Main source of short-term loans for business firms  Largest and most important financial institutions in Canada  Only a few banks, each with hundreds of branches  Schedule A banks o Canadian-Owned o No more than 10% of voting shares controlled by a single interest  Schedule B Banks o Domestically owned banks that do not meet the 10 % limit or may be foreign controlled o Limited to one main office and one branch o Foreign Controlled Banks -> Deposits do not exceed the 8% of the total domestic assets of all banks in Canada SERVICES OFFERED BY BANKS PENSION SERVICES  Help customers establish savings plans for retirement  Financial intermediaries -> Receiving funds and investing them as intrusted  Provide customers with information investment possibilities TRUST SERVICES: The management of funds left “in the bank’s trust”  For a fee -> Trust department with make monthly bill payments and managing your investment portfolio  Manage 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 o Payable only after certain conditions are met  Banker’s Acceptance: A promise that the bank will pay a specified amount of money at a future date o Requires payment by a particular date FINANCIAL ADVICE  Help customers manage their money  Recommend different investment opportunities o Guaranteed investment certificates o Mutual Funds o Stocks o Bonds AUTOMATED TELLER MACHINES  Allow customers to withdraw money and make deposits 24/7  Allow transfers of funds between accounts and provide information on account status  Some banks offer cards that can be used in affiliated nationwide systems  Banks are chartered by the federal government and are closely regulated when they provide these services BANKS DEPOSITS  Accepting deposits and making loans 2 | P a g e MANAGEMENT II  When applying for loans -> Remember the banker is interested in making money for the bank, how the loan will be repaid and how it will be secured  Cash flow analysis + Written Statement  Chequable Deposit: A chequing account o Can write cheques against the balance in their accounts o Bank must honour these cheques immediately o AKA demand deposits  Term Deposit: Money that remains with the bank for a period of time with interest paid to the depositor o Regular Passbook Savings Account  Intended for individual savers NPO o Guaranteed Investment Certificate  Deposit if made for a specified period of time ranging from 28 days to several years  Available to all savers  Cannot be cashed in before their maturity dates BANK LOANS  Major source of short-term loans for business  Secured Loan: Backed by Collateral such as accounts receivable or life insurance policy  Unsecured Loan: Backed only by the borrower’s promise to repay it o Only allowed for the most creditworthy borrowers  Pay interest on loans  Prime Rate of Interest: the lowest rate charged to borrowers o For large firms with excellent credit records o Changes constantly due to changes in the demand for and supply of loanable funds BANKS AS CREATORS OF MONEY  By taking in deposits and making loans -> Expand the money supply  Reserve Requirement: The requirement (unit 1991) that banks keep a portion of their chequable deposits in vault cash or as deposits with the Bank of Canada  No reserve requirement o Banks could theoretically create infinite amounts of money o Risky o Dropping of the reserve requirement means that banks will be able to create more money than they did when there was a reserve requirement OTHER CHANGES IN BANKING DEREGULATION  Caused banks to shift away from their historical role as intermediaries between depositors and borrowers  Canada’s banks are diversifying to provide a wider array of financial products to their clients  Large companies have reduced their use of bank loans o Compensate for loss -> Banks are setting up money market operations  Issuing commercial paper CHANGING CONSUMER DEMANDS  Customers are turning to non-traditional, electronic banks that have very few tellers or branches  Banks doing investment banking which is fees-based ELECTRONIC FUNDS TRANSFER: A financial service that combines computer and communication technology to transfer funds or information into, from, with, and among financial institutio
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