Part 6 Financing the Enterprise

Transcription

1 Part 6 Financing the Enterprise 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

2 15-2 CHAPTER 14 Accounting and Financial Statements CHAPTER 15 Money and the Financial System CHAPTER 16 Financial Management and Securities Markets APPENDIX D Personal Financial Planning

3 15-3 Learning Objectives LO 15-1 Define money, its functions, and its characteristics. LO 15-2 Describe various types of money. LO 15-3 Specify how the Federal Reserve Board manages the money supply and regulates the American banking system. LO 15-4 Compare and contrast commercial banks, savings and loan associations, credit unions, and mutual savings banks. LO 15-5 Distinguish among nonbanking institutions such as insurance companies, pension funds, mutual funds, and finance companies. LO 15-6 Investigate the challenges ahead for the banking industry. LO 15-7 Recommend the most appropriate financial institution for a hypothetical small business.

4 15-4 Money in the Financial System Finance The study of money; how it s made, how it s lost, and how it s managed Money (Currency) Anything generally accepted in exchange for goods and services Fiat money is a paper money not readily convertible to a precious metal such as gold o Gained full acceptance during the Great Depression in the 1930s In the U.S., paper money is really a government note or promise, worth the value specified on the note

5 15-5 Medium of Exchange Before fiat money, the trade of goods and services was accomplished through bartering Trading one good or service for another of similar value Inefficient because not always divisible and can be complicated in multiple-party transactions People have used giant round stones, like the ones shown here, for money

6 15-6 Functions of Money Measure of Value Money serves as a common standard or yardstick of the value of goods and services Store of Value Money serves as a way to accumulate wealth (buying power) until it is needed The value of stored money is directly dependent on the health of the economy If, due to rapid inflation, all prices double within a year, then the purchasing power of money would fall by half Deflation occurs when prices of goods fall Often lead to decreases in wages and increases in debt burden

7 15-7 Characteristics of Money To be used as a medium of exchange, money must have: Acceptability Divisibility Portability Stability Durability Difficult to counterfeit

8 15-8 Counterfeit Currency The U.S. government redesigns currency in order to stay ahead of counterfeiters and protect the public DID YOU KNOW? Around 75 percent of counterfeit currency is found and destroyed before it ever reaches the public

9 15-9 Costs to Produce Pennies and Nickels

10 15-10 Types of Money Paper Money and Coins Checking Account (Demand Deposit) Money stored in an account at a bank or other financial institution that can be withdrawn without advance notice; also called demand deposit Savings Accounts (Time Deposits) Accounts with funds that usually cannot be withdrawn without advance notice; also known as time deposits

11 15-11 A Check

12 15-12 Money Market Accounts and Certificates of Deposit (CDs) Money Market Accounts Accounts that offer higher interest rates than standard bank rates but with greater restrictions Certificates of Deposit (CDs) Savings accounts that guarantee a depositor a set interest rate over a specified interval as long as the funds are not withdrawn before the end of the period six months or one year for example

13 15-13 Credit Cards Credit Cards Means of access to preapproved lines of credit granted by a bank or finance company Some pay off their credit cards monthly, while others make monthly payments Charges for unpaid balances can run 18% at an annual rate (one of the most expensive ways to borrow money) Credit CARD (Card Accountability Responsibility and Disclosure) Act was passed into law in 2009 To regulate the practices of credit card companies that were coming under attack by consumers Important to all companies and cardholders

14 15-14 Debit Card and Near Money Debit Card A card that looks like a credit card but works like a check Using it results in a direct, immediate, electronic payment from the cardholder s checking account to a merchant or third party Traveler s Checks, Money Orders, and Cashier s Checks Common forms of near money Guaranteed as cash

15 15-15 Credit Card Fraud More and more computer hackers have managed to steal credit card information and either use the information for: Internet purchases Make a card exactly the same as the stolen card Retail giant Target lost the information of more than 40 million credit cards to hackers Losses on credit card theft run into the billions Consumers are usually not liable for the losses Debit cards do not have the same level of protection as credit cards

16 15-16 The American 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 nation s banking and financial industry Organized into 12 regions Each with a Federal Reserve Bank that serves its defined area The chief economic policy arm on the U.S. Tries to create a positive economic environment capable of: 1. Sustaining low inflation 2. High levels of employment 3. Balance in international payments 4. Long-term economic growth

17 15-17 The Federal Reserve System Four Major Functions Controls the money supply with monetary policy Regulates financial institutions Manages regional and national check-clearing procedures Supervises the federal deposit insurance of commercial banks in the Federal Reserve system

18 15-18 Monetary Policy 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 This could result in: Rapid price increases (inflation) because of too little money Economic recession and a slowdown of price increases (disinflation) because of too little growth in the money supply

19 15-19 Fed Tools for Regulating the Money Supply

20 15-20 One of the roles of the Federal Reserve is to use its policies to keep money flowing Federal Reserve Money is the lifeblood of the economy If banks become too protective of their funds and stop lending money, the economy can grind to a halt

21 15-21 Four Main Monetary Policy Tools 1. Open Market Operations Decisions to buy or sell U.S. Treasury bills (short-term debt issued by the U.S. government) and other investments in the open market Buying securities increases money in supply and vice versa 2. Reserve Requirements Percentage of deposits that banking institutions must hold in reserve Has a strong effect on the economy and not used often 3. Discount Rates Rate of interest the Fed charges to loan money to banking institution to meet reserve requirements Lowering discount rate encourages borrowing and expands money supply and vice versa 4. Credit Controls Authority to establish and enforce credit rules for financial institutions and some private investors

22 15-22 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

23 15-23 Commercial Banks and Savings and Loan Associations Commercial Banks Largest and oldest of all financial institutions, relying mainly on checking and savings accounts Sources of funds for loan to businesses and individuals Savings and Loan Associations (S&Ls also called thrifts ) Financial institutions that primarily offer savings accounts and make long-term loans for residential mortgages; also called thrifts Most have merged with commercial banks

24 15-24 JPMorgan Chase JPMorgan Chase is the second-largest commercial bank in the United States behind Bank of America

25 15-25 Credit Unions and Mutual Savings Banks New hybrid bank institutions perform multiple functions Credit Unions Financial institutions owned and controlled by depositors Usually having a common employer, profession, trade group, or religion Mutual Savings Banks Financial institutions that are similar to savings and loan associations but, like credit unions, are owned by their depositors Found mostly in New England

26 15-26 FDIC and NCUA Federal Deposit Insurance Corporation (FDIC) An insurance fund established in 1933 that insures individual bank accounts Insures personal accounts up to a maximum of $250,000 at nearly 8,000 FDIC member institutions National Credit Union Association (NCUA) An agency that regulates and charters credit unions and insures their deposits through its National Credit Union Insurance Fund

27 15-27 Bank Failures Bank Failures Large bank failures occurred during this most recent recession 474 banks failed between January 2009 and May 31, 2014 Compare this to 52 failures between January 2000 and December 31, 2008 As of March 2014 number of problem banks has declined for 12 quarters in a row

28 15-28 Is the World Bank Serious about Sustainability? The World Bank raises money through donations, bond sales, and shareholder support The money is used to provide loans and other financial assistance to developing countries Realizing that funding certain projects could negatively affect the environment the World Bank adopted policies to assess the sustainability of proposed projects The World Bank must juggle both the human and environmental impacts when determining which projects to fund The World Bank has taken steps to curb climate change and support renewable energy

29 15-29 Nonbanking Institutions Diversified Firms Traditionally non-financial firms that have expanded into the financial field Insurance Companies Businesses that protect their clients against financial losses from certain specified risks (death, accident, and theft, for example) Pension Funds Managed investment pools set aside by individuals, corporations, unions, and some nonprofit organizations to provide retirement income for members

30 15-30 State Farm Insurance State Farm Insurance allows users to input their information on its website to receive an auto insurance quote quickly and conveniently

31 15-31 Nonbanking Institutions (cont.) Mutual Fund An investment company that pools individual investor dollars and invests them in large numbers of well-diversified securities Brokerage Firm Firms that buy and sell stocks, bonds, and other securities for their customers and provide other financial 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 short-term loans at substantially higher rates of interest than banks

32 15-32 Hedge Funds Hedge funds are large pools of money that are managed and used to invest in activities that promise a high return on investment High minimum initial investment requirement Only the wealthy are able to be involved Similar to mutual funds except hedge fund investments can be high risk o o Increases the chances of a higher return on investment Main point of contributing to a hedge fund

33 15-33 EFT and ATM Electronic Funds Transfer (EFT) Any movement of funds by means of an electronic terminal, telephone, computer, or magnetic tape Automated Teller Machines (ATM) The most familiar form of electronic banking, which dispenses cash, accepts deposits, and allows balance inquiries and cash transfers from one account to another

34 15-34 ACHs and Online Banking Automated Clearinghouses (ACHs) A system that permits payments such as deposits or withdrawals to be made to and from a bank account by magnetic computer tape Advantages of direct deposits to consumers include convenience, safety, and potential interest earnings Online Banking Bank at home or anywhere/anytime Banking activities are now conducted on a computer at home/work, or through wireless devices such as cell phones and PDAs 62% of adults list Internet banking as their preferred banking method

35 15-35 Cost of Borrowing Poses a Threat to Brazilian Consumers The Brazilian economy has been booming in recent years, creating a growing middle class and consumers are spending and using credit like never before The central bank of Brazil has increased interest rates Credit cards have an annual interest rate of 238% on average, whereas the cost of borrowing for personal loans is 85% for retailers and 47% for banks Higher interest rate tend to deter spending Inflation in Brazil has risen significantly, which in turn increases the cost of borrowing

36 15-36 Computers and handheld devices have made online banking extremely convenient Bank Online However, hackers have stolen millions from banking customers by tricking them into visiting websites and downloading malicious software that gives the hackers access to their passwords

37 15-37 Impact of Financial Crisis Advances in technology are challenging and changing the banking industry During , the financial markets collapsed under the weight of declining housing prices, subprime mortgages (mortgages with low-quality borrowers) and risky securities backed by these subprime mortgages Future of the structure of the banking system is in the hands of the U.S. Congress Dodd-Frank Wall Street Reform and Consumer Protection Act Intent of the act is to eliminate the ability of banks to create this type of problem in the future

38 15-38 Shadow Banking and Peer-to-Peer Lenders Shadow banking refers to companies performing banking functions of some sort that are not regulated by banking regulators Activities are increasing Jamie Dimon, CEO and chairman, of JPMorgan Chase stated to his shareholders that the bank will face tough competitors, including shadow banking Peer-to-peer lenders like Prosper, a company that matches investors and borrowers with loans between $2,000 and $35,000 Other sources of funding by Internet websites such as GoFundMe and Kickstarter help people raise funds for things as diverse as health care issues to creative projects in art, film, games, and music

39 15-39 Mobile Money Transfer (M-PESA) In developing economies, the financial infrastructure is not well supported. Many people in these areas have had to travel many hours by foot or train to retrieve their money for everyday purchases such as food. M-PESA was created to alleviate this problem. It uses mobile phones, which have become widespread in developing economies, to make money transfers. All that is required of the user is their national ID or passport information, and they can send or receive money within a matter of minutes.

40 15-40 Solve the Dilemma Seeing the Financial Side of Business Dr. Stephen Hill, a successful optometrist, developed his first saleable product (a truly scratch-resistant and lightweight lens) Decided to invest his life savings and open Hill Optometrics to manufacture and market hi invention Uncertain about the financial side of business and the various functions of different financial institutions Aware he will need financial services: Checking and savings accounts Various short-term investments that can easily/quickly be converted to cash as needs dictate Sources of borrowing capacity should need for short- or long-term loans arise

41 15-41 Solve the Dilemma Seeing the Financial Side of Business (cont.) Discussion Questions Despite Hill s research: He is still somewhat unclear about the merits and capacities of each type of financial institution He has turned to you, hiss 11 th patient of the day, for help List the various types of U.S. financial institutions and the primary function of each. What services of each financial institution is Hill s new company likely to need? Which single financial institution is likely to be best able to meet Hill s small company s needs now? Why?

42 15-42 Discussion? What are the six characteristics of money? Explain how the U.S. dollar has those six characteristics.? Discuss the four economic goals the Federal Reserve must try to achieve with its monetary policy.? Why do credit unions charge lower rates than commercial banks?? How are mutual funds, money market funds, and pension funds similar? How are they different?