INTRODUCTION TO FINANCE MGMT 005 INTRODUCTION TO BUSINESS AND FINANCE

Transcription

1 INTRODUCTION TO FINANCE MGMT 005 INTRODUCTION TO BUSINESS AND FINANCE

2 DEFINITION OF FINANCE The science that describes the management, creation and study of money, banking, credit, investments, assets and liabilities. Finance consists of financial systems, which include the public, private and government spaces, and the study of finance and financial instruments, which can relate to countless assets and liabilities. Some prefer to divide finance into three distinct categories: public finance, corporate finance and personal finance. All three of which would contain many sub-categories.

3 DEFINITION OF MONEY An officially-issued legal tender generally consisting of currency and coin. Money is the circulating medium of exchange as defined by a government. Money is often synonymous with cash, including negotiable instruments such as checks. Each country has its own money, or currency, that is used as a medium exchange within that country (some countries share a type of currency, such as the euro used by the European Union). The currency of one country can be exchanged for the currency of another via a currency exchange. The current exchange rate determines how much of one currency must be used to purchase a specified amount of the other currency. For example, the exchange rate between the euro and the US dollar may be ,where 1 euro can buy US dollars.

4 DEFINITION OF MONETARY POLICY The actions of a central bank, currency board or other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates. Monetary policy is maintained through actions such as increasing the interest rate, or changing the amount of money banks need to keep in the vault (bank reserves).

5 MORE ON MONEY Barter system A system of exchange in which goods or services are traded directly for other goods or services Money Anything a society uses to purchase products, services, or resources

6 MONEY SUPPLY M-1 AND M-2 Demand deposit An amount on deposit in a checking account Time deposit An amount on deposit in an interest-bearing savings account Two main measures of the supply of money M1 Currency, demand deposits, and travelers checks M2 M1 plus savings accounts, certain money-market securities and small-denomination time deposits or certificates of deposit (CDs) of less than $100,000

7 FEDERAL RESERVE SYSTEM The central bank of the United States responsible for regulating the banking industry Controlled by a seven-member board of governors who are appointed by the president and confirmed by the Senate to serve a fourteen-year term Composed of twelve district banks and twenty-four branch banks District banks are owned by commercial banks that are members of the Federal Reserve system Main function is to regulate the banking system and maintain a healthy economy

8 U.S.FEDERAL RESERVE SYSTEM

9 FEDERAL RESERVE SYSTEM Regulation of reserve requirements Reserve requirement the percentage of its deposits a bank must retain, either in its own vault or on deposit with its Federal Reserve District Bank More required reserves = less money in circulation Less required reserves = more money in circulation to stimulate the economy

10 FEDERAL RESERVE SYSTEM Regulation of the discount rate Discount rate the interest rate the Federal Reserve System charges for loans to member banks Lower loan rates allow banks to lend more and stimulate the economy Higher rates slow the economy

11 FEDERAL RESERVE SYSTEM Regulation of the discount rate Discount rate the interest rate the Federal Reserve System charges for loans to member banks Lower loan rates allow banks to lend more and stimulate the economy Higher rates slow the economy

12 THE POWER OF MONEY

13 AMERICAN BANKING INDUSTRY Banking and financial reform: New regulations Goals are Protection from unfair, abusive financial and banking practices Close gaps that allowed large banks and financial firms to avoid strong, comprehensive federal oversight Curb high-risk investment strategies Require banks and financial firms to pay back bailout funds Provide a foundation for stable economic growth

14 AMERICAN BANKING INDUSTRY Commercial bank A profit-making organization that accepts deposits, makes loans, and provides related services to its customers National bank: chartered by the U.S. Comptroller of the Currency State bank: chartered by the banking authorities in the state in which it operates

15 AMERICAN BANKING INDUSTRY Other financial institutions Savings and loan associations (S&L) A financial institution that offers checking and savings accounts and CDs and that invests most of its assets in home mortgage loans and other consumer loans Credit unions A financial institution that accepts deposits from and lends money to only those people who are its members Members are usually employees of a particular firm, people in a particular profession, or those who live in a community served by a local credit union

16 AMERICAN BANKING INDUSTRY Other financial institutions (cont d) Organizations that perform banking functions Mutual savings banks Insurance companies Pension funds Brokerage firms Finance companies Investment banking firms

17 TRADITIONAL BANKING SERVICES Checking accounts Check a written order for a bank or other financial institution to pay a stated dollar amount to the business or person indicated on the check NOW account an interest-bearing checking account Savings accounts Passbook savings account Certificate of deposit (CD) a document stating that the bank will pay the depositor a guaranteed interest rate for money left on deposit for a specified period of time Short- and long-term loans Line of credit a loan that is approved before the money is actually needed Revolving credit agreement a guaranteed line of credit Collateral real estate or property pledged as security for a loan

18 TRADITIONAL BANKING SERVICES Credit-card and debit card transactions Banks and other financial institutions charge merchants fees (a percentage of each credit card transaction) for handling the transactions for the merchant Debit card a card that electronically subtracts the amount of a purchase from the cardholder s bank account at the moment the purchase is made

19 FUTURE OF BANKING Changes in the banking industry Anticipated changes More emphasis on evaluating the creditworthiness of loan applicants as a result of the recent economic crisis An increase in government regulation of the industry A reduction in the number of banks, S&Ls, credit unions, and financial institutions because of consolidation and mergers Globalization of the banking industry

20 FUTURE OF BANKING Anticipated changes (cont d) The importance of customer service as a way to keep customers from switching to competitors Increased use of credit and debit cards and a decrease in the number of written checks Increased competition from nonbank competitors that provide many of the same services as banks (S&Ls, credit unions) Continued growth in online banking

21 ONLINE BANKING Advantages Easy access to account regardless of time or location Ability to obtain current account balances Convenience of transferring funds Ability to pay bills Convenience of seeing which checks have cleared Easy access to current interest rates Simplified loan application procedures For banks lower processing costs Disadvantages Not being able to discuss financial matters with a personal banker

22 ELECTRONIC FUNDS TRANSFERS ( EFT S ) A means of performing financial transactions through a computer terminal or telephone hookup Changing how banks do business Automated teller machines (ATMs) Automated clearinghouses (ACHs) Point-of-sale (POS) terminals Electronic check conversion (ECC)

23 FDIC AND NCUA Federal Deposit Insurance Corporation (FDIC) Created as a result of the Depression, to restore public confidence in the banking industry to insure deposits against bank failures FDIC provides deposit insurance of $250,000 per account National Credit Union Association (NCUA) Insures the deposits of credit union members for up to $250,000 per account

24 EFFECTIVE CREDIT MANAGEMENT The five Cs of credit management Character the borrower s attitude toward credit obligations Capacity the borrower s financial ability to meet credit obligations Capital the extent of the borrower s assets or net worth Collateral borrower assets that can be pledged as security for a loan Conditions general economic conditions that can affect a borrower s ability to repay the loan