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Chapter 8

chapter 8 notes


Department
Management (MGT)
Course Code
MGTA02H3
Professor
Chris Bovaird
Chapter
8

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Chapter 8 Understanding Money and Banking Notes
What is Money?
The Characteristics of Money
x modern money usually takes the form of stamped metal or printed paper that is issued by governments
x but over the centuries, items as diverse as stone wheels, salt, wool, livestock, shells, and spices have been used as money
x coins probably came into use sometime around 600 BCE and paper money around 12000 CE
x just about any object can serve as money if it is portable, divisible, durable, and stable
x money Æ any object generally accepted by people as payment for goods and services
The Functions of Money
x money serves three functions: medium of exchange, store of value, and unit of account
Credit Cards: Plastic Money?
x credit—especially as extended through credit cards—has become a major factor in the purchase of consumer goods in Canada
x nevertheless, credit cards do not qualify as money; rather, credit cards are a money substitute—they serve as a temporary
medium of exchange but are not a store of value
x they are big business for 2 reasons: (1) they are quite convenient, (2) credit cards are extremely profitable for issuing companies
x profits derive from two sources:
1) Some cards charge annual fees to holders. All charge interest on unpaid balances. Depending on the issuer, cardholders
pay interest rates ranging from 11 to 20%.
2) Merchants who accept credit cards pay fees to card issuers. Depending on the merchant’s agreement with the issuer, 2 to
5% of total credit-sales dollars goes to card issuers.
The Canadian Financial System
x many forms of money, especially demand deposits and time deposits, depend on the existence of financial institutions to provide
a broad spectrum of services to both individuals and businesses
Financial Institutions
x the main function of financial institutions is to ease the flow of money from sectors with surpluses to those with deficits
x they do this by issuing claims against themselves and using the proceeds to buy the assets of—and thus invest in—other firms
x there are variety of financial intermediaries in Canada—they vary in size, in importance, in types of sources they appeal to, in
form of claim they give to sources of funds, in users they supply credit to, and in type of claim they make against users of funds
x for many years, the financial community in Canada was divided rather clearly into 4 distinct legal areas, often called the “4
financial pillars”, they were: (1) chartered banks; (2) alternate banks, such as trust companies and caisses populaires or credit
unions; (3) life insurance companies and other specialized lending and saving intermediaries, such as factors, finance companies,
venture capital firms, mutual funds, and pension funds; and (4) investment dealers
Financial Pillar #1—Chartered Banks
x chartered bank Æ 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;
they are the main source of short-term loans for business firms
x chartered banks are the largest and most important financial institutions in Canada
Services Offered by Banks
x most now offer bank-issued credit cards and safe-deposit boxes
x in addition, many offer pension, trust, international, and financial advice, and electronic money transfer
Pension Services
x most banks help customers establish savings plans for retirement
x banks serves as financial intermediaries by receiving and investing funds; and also providing info on investment possibilities
Trust Services
x trust services Æ the management of funds left “in the bank’s trust”
International Services
x the three main international services offered by banks are currency exchange, letters of credit, and banker’s acceptance
x letter of credit Æ a promise by a bank to pay money to a business firm if certain conditions are met
x banker’s acceptance Æ a promise that the bank will pay a specified amount of money at a future date
Financial Advice
x depending on the customer’s situation, the bank may recommend different investment opportunities
x the recommended mix might include guaranteed investment certificates, mutual funds, stocks, and bonds
Automated Teller Machines
x electronic automated teller machines (ATMs) allow customers to withdraw money and make deposits, 24 hours/day, 7 days/week
x they also allow transfers of funds between accounts and provide information on account status
x machines are now located at bank buildings, grocery stores, airports, shopping malls, and other locations around the world
Bank Deposits
x chartered banks provide a financial intermediary service by accepting deposits and making loans with this money
x the types of deposits: chequable deposit, term deposit, and guaranteed investment certificate (GIC)
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