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Chapter 10

MGTA02H3 Chapter Notes - Chapter 10: Secured Loan, Savings Account, Digital Currency

Management (MGT)
Course Code
Chris Bovaird

of 14
Chapter 10 Understanding Money and Banking
The value of everything you own is your personal wealth. Not all of it is money.
The Characteristics of Money
Modern money usually takes form of stamped metal or printed paper that is issued
by governments.
Just about any object can serve as money if it is portable, divisible, durable, and
Money is any object generally accepted by people as payment for goods and services.
The Functions of Money
Money serves three functions:
oMedium of exchange: we use money as a way of buying and selling things.
Without money, we would be bogged down in a system of barter.
oStore of value: in the form of currency, money can be used for future
purchases and therefore stores value.
oUnit of account: money lets us measure the relative values of goods and
services. It acts as a unit of account because 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 do not qualify as money.
They are a money substitute; they serve as a temporary medium of exchange but are
not a store of value.
Credit cards are big business for two reasons:
oThey are quite convenient.
oCredit cards are extremely profitable for issuing companies.
Profits derive from two sources:
oSome cards change annual fees to holders. All charge interest on unpaid
balances. Depending on the issuer, cardholders pay interest rates ranging
from 11 to 20 percent.
oMerchants who accept credit cards pay fees to card issuers. Depending on the
merchants agreement with the issuer, 2 to 5 percent of total credit-sales
dollars goes to card issuers.
Many forms of money depend on the existence of financial institutions to provide a
broad spectrum of services to both individuals and businesses.
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.
oThey do this by issuing claims against themselves and using the proceeds to
buy the assets of–and invest inother organizations.
oA bank can issue financial claims against itself by making available funds for
chequing and savings accounts.
oIn turn, its assets will be mostly loans invested in individuals and businesses
and perhaps in government securities.
There are a variety of financial intermediaries in Canada. They vary in size, in
importance, in the types of sources they appeal to, in the form of the claim they give
to sources of funds, in the users they supply credit to, and in the type of claim they
make against the users of funds.
The financial community in Canada was divided into four financial pillars:
chartered banks, investment dealers, life insurance companies and other specialized
lending and saving intermediaries, and alternate banks.
The crumbling of the four financial pillars began in 1980 when several changes were
made to the Bank Act.
Canadian banks are now permitted to own securities dealers. They are also
permitted to own insurance companies. Banks have also established subsidiaries to
sell mutual funds.
The changes to the Bank Act have also allowed subsidiaries of foreign banks to set
up business in Canada, and over 40 of them have done so.
In 1997, the legislation was changed again to allow branches of foreign banks to
conduct business in Canada.
Trust companies have declined in importance during the last few years, and many
trust companies have been bought by banks or insurance companies.
Insurance companies are facing increased challenges since banks can now sell
The mutual fund business is booming and has created many new jobs during the last
A chartered bank is a privately owned, profit-seeking firm that serves individuals,
non-business organizations, and businesses as a financial intermediary.
Chartered banks 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.
Chartered banks are the largest and most important financial institutions in