Textbook Notes (368,214)
Canada (161,710)
MGTA02H3 (363)
Chapter 18

Management II Chapter 18

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Management (MGT)
Chris Bovaird

Management Chapter 18: Understanding Money and Banking What is Money? • Money: any object generally accepted by people as payment for goods and services (usually stamped metal or printed paper; but can also include commodities, ex. Salt, wool) The Characteristics of Money 1. Portability: modern currency is lightweight and easy to handle 2. Divisibility: modern currency is easily divisible into smaller parts with fixed values for each unit (ex. CDN dollar can be divided into 4 quarters, 10 dimes, 20 nickels, 100 pennies < or any combinations of those) 3. Durability: modern currency does not spoil or die, if it wears out it can be easily replaced 4. Stability: paper value fluctuates over time but is considerably more stable than other commodities (ex. Value of fish rises and falls with the fishing season) The Functions of Money • Barter economy: economy in which goods are exchanged directly for one another o Inefficient because seller must find buyer who is willing to trade for the specific goods that the seller has (barter trade accounted for half the business transactions in Russia in the late 1990) 1. Medium of exchange: way of buying and selling things without inefficiency of barter system 2. Store of value: in the form of currency, money can be used for future purchases, therefore stores value 3. Unit of account: money allows us to measure the relative values of goods and services (all products can be valued and accounted for in terms of money) The Spendable Money Supply: M1 • M-1: only the most liquid forms of money (currency and demand deposits) • Currency: paper money and coins issued by the government • Legal tender: money that the law requires a creditor to accept in payment of a debt • Cheque: An order instructing the bank to pay a given sum to a specified person or firm • Demand Deposit: money in chequing accounts; counted as M-1 because such funds may be withdrawn at any time without notice M1 Plus the Convertible Money Supply: M-2 • M-2: everything in M-1plus savings deposits, time deposits, and money market mutual funds (accounts for nearly all of the nation’s money supply > in 2003 it equaled $566.1 billion) • Time deposit: a deposit that requires prior notice to make a withdrawal; cannot be transferred to others by cheque (attractive in the 1970s-80s because of high interest rates) • Money market mutual funds: funds operated by investment companies that bring together pools of assets from many investors (attractive in the 1980s-90s because of high payoffs) Credit Cards: Plastic Money? • Not included in M-1 or M-2, credit cards are a substitute of money, not a store of value • Some cards charge annual fees, all charge interest on unpaid balances (around 11-20%) • Merchants who accept credit cards pay fees to card issuers (about 2-5% of total credit- sales) The Canadian Financial System • Businesses need stable financial institutions to underwrite modernization and expansion, and individuals need them to handle currency Financial Institutions • The main function of financial institutions is to ease the flow of money from sectors with surpluses to those with deficits o A bank can issue financial claims against itself by making available funds for chequing and savings accounts, its assets will be mostly loans invested in individuals and individuals (and in government securities) • The financial community in Canada was divided into 3 legal areas (the four financial pillars): chartered banks; alternate banks such as trust companies or credit unions; life insurance companies and other specialized lending and saving intermediaries such as factors, finance companies, venture capital firms, mutual funds and pension funds; investment dealers • The four pillars began to crumble when changes to the Bank Act allowed banks to own securities dealers, insurance companies, subsidiaries selling mutual funds and banks are now allowed to sell insurance Financial Pillar 1 – Chartered Banks • Chartered Bank: a privately owned, profit seeking form that serves individuals, non- business organizations, and businesses as a financial intermediaries • Canada has a branch banking system where few bank has thousands of branches, US has thousands of banks with few branches Services Offered by Banks • Pension services: banks help customers establish savings plans for retirement (serve as financial intermediary by receiving funds and investing them as directed by customers, also provide information on investment possibilities • Trust services: the management of funds left “in the bank’s trust”- making bill payments, managing investment possibilities, estates of the deceased (for a fee) • International Services: currency exchange, letters of credit and banker’s acceptances o Currency exchange: exchanging Canadian dollars for the currency of another country or vice versa o Letter of credit: a promise by a bank to pay money to a business firm if certain conditions are met o Banker’s acceptance: a promise that the bank will pay a specified amount of money at a future date • Financial Advice: managing clients money, recommending investment opportunities, etc • Automated teller machines (ATMs): all customers to deposit/withdraw money 24/7; also allow transfer of funds between accounts and provide account info Bank Deposits • Chartered banks accept deposits and make loans with that money • Chequable deposit: a chequing account • Term deposit: money that remains with the bank for a period of time with interest paid to the depositor (savings account, guaranteed investment certificate- GIC) Bank Loans • Banks are major source of short-term loans for business (also make long-term loans) o Secured loan: backed by collateral such as accounts receivable or a life insurance policy (if loan cannot be repaid, bank sells collateral) o Unsecured loan: backed only by a promise to pay • Prime rate of interest: lowest rate charged to borrowers (charged to large firms with excellent credit records) Banks as Creators of Money • Banks create money through loaning deposits • Reserve requirement: the requirement (until 1991) that banks keep a portion of the chequable deposits in vault cash or as deposits with the Bank of Canada (reserves are around 10%) • Banks lend out the money that is not in the reserve • If there are no reserves, banks can create infinite amounts of money but it is risky Other Changes in Banking • Deregulation: banks can now provide more financial services (investments, selling commercial paper (100 TD bank executives attended Harvard course on investment banking) Changing Consumer Demands • Consumers don’t want to just keep their money in the bank when they can be making money elsewhere, so they are turning to unconventional forms of banking such as ING Direct, PC Financial • Previously banks made profit from the difference between interests rates paid to depositors and charged on loans; investment banking is fee based The Impact of Electronic Technologies • Debit cards: a type of plastic mone
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