CHAPTER 1 REVIEW
MONEY, BANKING AND FINANCIAL MARKETS
The Six Parts of a Financial System
Money is the start of the financial system and the means for making purchases. Accumulating money is a determining factor in defining wealth. Those who store more money are wealthier than those who do not. The consistency of money has a tendency to morph based on changes in the financial system and technology.
2. Financial Instruments
Financial instruments are also known as securities, though the layman's terms are stocks, bonds, mortgages and insurance. At one time, the dealing and trading of stocks was typically limited to wealthy individuals who could afford to pay ...view middle of the document...
Through examination and enforcement of strict guidelines, regulatory agencies supervise members of the financial system to ensure the safety of the public's money and investments. Government examiners review the systems in place at financial institutions and markets, and they teach and encourage best practices.
6. Central Banks
Almost every country in the world has a central bank that is integral to each country's government. The founding of central banks was originally a means to finance wars, but today's central banks control the availability of money and credit. They are integral to the stability of the country's financial system as they oversee national currency and its value. The U.S. Federal Reserve is one of the most important central banks in the modern world.
The Five Core Principles of Money and Banking
1. Time Has Value
You are not indifferent between getting $100 today versus waiting one year to receive $100. This is certainly not news to you, so on some level you know that the timing of payments is an important part of any financial transaction. Lenders will demand compensation for parting with their money and getting it back slowly over time. Borrowers are will to give this compensation in returns for getting the needed funds today. This is the basis for an interest rate. Furthermore, how long payments are stretched out, and how frequently they occur will be important in determining the value of any financial instrument. Value is based on both the size and the timing of promised payments.
2. Risk Requires Compensation
Risk is pretty much unavoidable, and we don't like it. Putting these two realities together means that people are will to pay to avoid risk and that those who assume certain risks will demand compensation. This is the whole basis of the insurance industry. So then the...