Chapter 10- Understanding Money and Banking

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Published on 30 Sep 2011
School
UTSC
Department
Management (MGT)
Course
MGTA02H3
Chapter 10- Understanding Money and Banking
1- Define money and identify the different forms it takes in the nation’s money
supply
WHAT IS MONEY?
Wealth- the value of everything you own
Barter system- exchange goods for goods
The Characteristics of Money
Money- any object generally accepted by people as payment for goods and services
Portability- lightweight and easy to handle
Divisibility- match units of money with the value of all goods
Durability- shouldn’t lose its value
Stability- everyone wants paper money and coins
The Functions of Money
Money serves 3 functions:
oMedium of exchange- use money as a way of buying and selling
things
oStore of value- money can be used to future purchases and
“stores” value
oUnit of account/standard of exchange- all products can be valued
and accounted for in terms of money
Currency is usually printed or minted by the government and guaranteed by
that government
The money supply is limited so that you only get money from exchanging value
Can’t create money- that would be counterfeiting
Credit Card: Plastic Money?
Credit cards do not qualify as money, but money substitute- serve as a
temporary medium of exchange but are not a store of value
Credits are big business because they are convenient and extremely profitable
for issuing companies
Profit derive from 2 sources:
oSome cards charge annual fees/interest on unpaid balances to
holders (11%-20%)
oMerchants who accept credit cards pay fees to card issuers
2- Describe the different kinds of financial institutions that make up the Canadian
financial system and explain the services they offer
THE CANADIAN FINANACIAL SYSTEM
Many forms of money depend on the existence of financial institutions to
provide a broad spectrum of services to individuals and businesses
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Financial Institutions
The main function 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
Financial intermediaries vary in size, importance, the types of sources they
appeal to, the form of the claim they give to sources of funds, the users they
supply credit to, and the type of claim they make against the users of funds
The financial community was divided into 4 distinct legal areas called the “4
financial pillars”:
oChartered banks
oInvestment dealers
oLife insurance companies and other specialized lending and saving
intermediaries (Ex: factors, finance companies, mutual funds, etc)
oAlternate banks (Ex: credit unions)
The crumbling of the 4 financial pillars began in 1980 when several changes
were made to the Bank Act and accelerated when additional changes were
made in 1987 and 1992
In 1997, legislation was changed again to allow branches of foreign banks to
conduct business in Canada
Many trust companies have been bought by banks or insurance companies
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 many other
services to their customers
Are the largest and most important financial institutions in Canada
Main source of short-term loans for firms
Services Offered by Banks
Banks accept deposits, make loans, offer bank-issued credit cards, and safe-
deposit boxes
Pension Services
Help customers establish savings plans for retirement
Banks serve as financial intermediaries by receiving funds and investing them
as directed by customers, and provide the customers with info on investment
possibilities
Trust Services
Trust services- the management of funds left “in the bank’s trust”
In return for a fee, the trust department will perform tasks such as making
monthly bill payments, managing investment portfolios, and manage the
estates of deceased people
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International Services
3 main international services offered by banks are:
oCurrency exchange
oLetters of credit- a promise by a bank to pay money to a firm if
certain conditions are met
oBanker’s acceptances- a promise that the bank will pay a
specified amount of money at a future date
Financial Advice
Many banks help their customers manage their money
The bank recommend different investment opportunities such as guaranteed
investment certificates, mutual funds, stocks, and bonds
Automated Teller Machines (ATM)
Electronic ATMs allow customers to withdraw money, make deposits, allow
transfers of funds between accounts, and provide info 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
Bank Deposits
Chequable/demand deposit- a chequing account
Customers who deposit coins, paper currency, or other cheques in their
chequing accounts can write cheques against the balance in their accounts
Term deposit- money that remains with the bank for a period of time with interest
paid to the depositor
The regular passbook savings account- although banks can require notice before
withdrawals can be made, they rarely do (intended for small individual savers
and non-profit organizations)
Guaranteed investment certificate- made for a specified period of time (28
days-several days), available to all savers, interest rate is higher than that paid
on a regular savings account, but many GICs cannot be cashed in before their
maturity date, so they are less flexible than a savings account
Bank Loans
A secured loan is backed by collateral such as accounts receivable or a life
insurance policy
An unsecured loan is backed only by the borrower’s promise to repay it
Prime rate of interest- the lowest rate charged to borrowers
Changes constantly owing to changes in the demand for and supply of loanable
funds
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Document Summary

1- define money and identify the different forms it takes in the nation"s money supply. Money- any object generally accepted by people as payment for goods and services: portability- lightweight and easy to handle, divisibility- match units of money with the value of all goods, durability- shouldn"t lose its value. The functions of money: money serves 3 functions: Medium of exchange- use money as a way of buying and selling. Store of value- money can be used to future purchases and o things o. Stores value o and accounted for in terms of money. Some cards charge annual fees/interest on unpaid balances to. Merchants who accept credit cards pay fees to card issuers. 2- describe the different kinds of financial institutions that make up the canadian financial system and explain the services they offer. The canadian finanacial system: many forms of money depend on the existence of financial institutions to provide a broad spectrum of services to individuals and businesses.