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Chapter 8

Chapter 8 notes


Department
Management (MGT)
Course Code
MGTA02H3
Professor
Janelle Leboutillier
Chapter
8

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Management Chapter 8: 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
oInefficient 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)
oDisadvantage in that both people must need something, the exchanged items
must be of the same value, and they need something at the exact same time
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)
Legal Tender: medium of payment that is recognized by the legal system to be valid for meeting a
financial obligation
Paper money is the most common form of legal tender
Credit Cards: Plastic Money?
Not included in M-1 or M-2, credit cards are a substitute of money, not a store of value
They are a temporary medium of exchange, i.e. they are NOT a store of value
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. In other words, it is to move money from people that do
have money to those without it
oA 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)
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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
oThe advantage of this is that Canadian banks are easier to regulate, are stable
(due to their size) and work efficiently on economies of scale. US banks on the
other hand, work only on a local scale, are hard to regulate, and are not very
efficient. They also do not have a larger portfolio
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 banks 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
oCurrency exchange: exchanging Canadian dollars for the currency of another
country or vice versa
oLetter of credit: a promise by a bank to pay money to a business firm if certain
conditions are met
oBankers 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 notes used to be offered: not anymore
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)
oSecured loan: backed by collateral such as accounts receivable or a life insurance
policy (if loan cannot be repaid, bank sells collateral)
oUnsecured 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)
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