FHF

McGraw-Hill/Irwin

Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

part

Financing the
Enterprise

CHAPTER 14 Accounting and Financial Statements

CHAPTER 15 Money and the Financial System
CHAPTER 16 Financial Management and Securities Markets

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Finance

The study of moneyhow its made, how its lost

and how its managed
Money

Anything generally accepted in exchange for goods

and services

Many materials have been used as money

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Functions of Money
Medium of exchange
Accepted as payment for products and resources
Bartering: Trading one good or service for another
of similar value

Inefficient because not always divisible and can be

complicated in multiple-party transactions

Measure of value
Single standard for assigning and comparing values of
products and resources

Store of value
Means of retaining and accumulating wealth
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Characteristics of Money

Acceptability
Divisibility
Portability
Stability
Durability
Difficulty to counterfeit

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Types of Money
Paper Money and Coins
Checking Account (Demand Deposit): Money
stored
in an account at a bank that can be withdrawn
without advance notice

Checks serve as a more secure substitute for cash

Savings Account (Time Deposit): Accounts with
funds that usually cannot be withdrawn without
advance notice

continued on next page

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Types of Money

Money Market Account

Higher interest rates than standard bank rates with

greater restrictions
Certificates of Deposit (CDs)

Savings accounts that guarantee a set interest rate

over a period of time providing funds are not
withdrawn before maturity

continued on next page

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Types of Money

Credit Cards

Means of access to preapproved lines of credit

granted by a bank or a finance company

Credit card companies have been the subject of

criticism and scrutiny

continued on next page

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Types of Money
Debit Card

A card that looks like a credit card but works like

a check

A direct electronic payment from the cardholders

checking account
Travelers Checks, Money Orders, Cashiers
Checks

Other common forms of near money

Guaranteed as cash
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The U.S. Financial System

Federal Reserve Board (The Fed)

Guardian of the American financial system

Independent agency of the federal government
Established in 1913 to regulate the nations banking
and financial industry

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The Fed
Four major functions:

1.Controls the money supply with monetary policy

2.Regulates financial institutions
3.Manages regional and national check-clearing
procedures

4.Supervises the federal deposit insurance of

commercial banks in the Federal Reserve system

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Monetary Policies

Monetary Policy

The means by which the Fed controls the amount of

money available in the economy

Aims to keep supply and demand in balance to avoid

inflation/deflation

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Four Main Monetary Policy Tools

1. Open Market Operations: Decisions to buy
or sell U.S. Treasury bills in the open market
Buying securities increases money in supply and vice versa

2. Reserve Requirements: Percentage of deposits a bank

must hold in reserve
Has a strong effect on the economy and not used often

3. Discount Rate: Rate of interest the Fed charges to loan

money to banking institutions
Lowering discount rate encourages borrowing and expands
money supply and vice versa

4. Credit Controls: Authority to establish and enforce

credit rules
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Other Regulatory Functions

of the Fed
Regulating member banks

Establishes and enforces banking rules that

affect monetary policy and competition

Has authority to approve bank mergers

Check clearing

National check processing through check

clearinghouses
Depository insurance

Supervises the federal insurance funds that protect

the deposits in member banking institutions
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Banking Institutions
Commercial Banks

Largest and oldest of all financial institutions,

relying mainly on checking and savings accounts

Loan to businesses and individuals

Savings and Loan Associations (S&Ls also called
thrifts)

Primarily offer savings accounts and make long-term

loans for residential mortgages

Most have merged with commercial banks

New hybrid bank institutions perform multiple functions
continued on next page

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Banking Institutions
Credit Unions

Financial institutions owned and controlled by

depositors

Usually having a common employer, profession, trade

group, or religion
Mutual Savings Banks

Similar to S&Ls, but owned by depositors

Found mostly in New England

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Insurance for Banks

Federal Deposit Insurance Corporation (FDIC)

Insures personal accounts up to $250,000

National Credit Union Association (NCUA)

Regulates and charters credit unions

Insures deposits through its National Credit Union
Insurance Fund

Similar to the FDIC

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Non-Banking Institutions

Diversified Firms: Traditionally non-financial firms

that have expanded into the financial field

Insurance Companies: Businesses that protect

their clients against losses from specified risks

Pension Funds: Managed investment pools to

provide retirement income for members

continued on next page

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Non-Banking Institutions
Mutual Fund: Investment company that pools
investor money and invests in large numbers
of diversified securities

Brokerage Firm: Buy and sell securities for clients

and provide other services

Investment Bank: Underwrites new issues of

securities for corporations, states and municipalities
needed to raise money in capital markets

Finance Companies: Businesses that offer shortterm loans at substantially higher interest rates than
banks
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Electronic Banking

ETF: Electronic funds transfer

ATM: Automated teller machines
ACHs: Automated clearinghouses
Online Banking: Bank at home or
anywhere/anytime
(Increasing the range of services)

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Future of Banking
Advances in technology are challenging and
changing the banking industry

Trend toward larger banks, even in the wake of

2008-2010 financial crisis
Uncertain whether the crisis will continue

Future of the banking industry will be shaped by

federal government action
Oversight and regulations to prevent future financial
meltdowns

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