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Part 6
Financing the
Enterprise
© 2015 McGraw-Hill Education.
15-2
CHAPTER 14
Accounting and Financial Statements
CHAPTER 15
Money and the Financial System
CHAPTER 16
Financial Management and Securities Markets
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.
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
 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
15-5
Functions of Money
•
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 multipleparty transactions
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
15-7
Characteristics of Money
To be used as a medium of exchange,
money must have:
• Acceptability
• Divisibility
• Portability
• Stability
• Durability
• Difficult to counterfeit
15-8
•
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
15-9
Costs to Produce Pennies and Nickels
15-10
Types of Money
Paper Money and Coins
Checking Account (Demand Deposit)
•
Money stored in an account at a bank or other
institution that can be withdrawn without advance
notice
Savings Accounts (Time Deposits)
•
Accounts with funds that usually cannot be
withdrawn without advance notice
15-11
A Check
15-12
Types of Money
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
15-13
Types of Money
Credit Cards
• Means of access to preapproved lines of credit
granted by a bank or finance company
 Popular substitute for cash payments because of their
convenience, easy access to credit, and acceptance by
merchants around the world
 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
15-14
Types of 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
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
15-16
The Federal Reserve System
• Controls the money supply with
monetary policy
• Regulates financial institutions
Four
• Manages regional and national
Major
check-clearing procedures
Function
• Supervises the federal deposit
s
insurance of commercial banks in
the Federal Reserve system
15-17
Monetary Policy
• The means by which the Fed
controls the amount of money
Monetary available in the economy
Policy • Aims to keep supply and demand
in balance to avoid
inflation/deflation
15-18
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.
15-19
Fed Tools for Regulating the Money Supply
15-20
Federal Reserve
• One of the roles of
the Federal Reserve
is to use its policies
to keep money
flowing
• 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
15-21
Four Main Monetary Policy Tools
1. Open Market Operations
• Decisions to buy or sell U.S. Treasury bill 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 Rates
• 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
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
15-23
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
15-24
Banking Institutions
 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
• Similar to S&Ls, but owned by depositors
• Found mostly in New England
15-25
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
15-26
Bank Failures
• More than 380 banks have
failed between 2009 - 2011
Bank
Failures • Consumers’ money
protected by FDIC
15-27
JPMorgan Chase is the second largest commercial
bank in the United States behind Bank of America
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
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 losses
from specified risks
Pension Funds
• Managed investment pools to provide retirement
income for members
15-30
Nonbanking 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 short-term loans at substantially higher
interest rates than banks
15-31
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
 Increases the chances of a higher return on investment
 Main point of contributing to a hedge fund
15-32
State Farm
Insurance allows
users to input their
information on its
website to receive
an auto insurance
quote quickly and
conveniently
15-33
Electronic Banking
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
15-34
Electronic 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
Online Banking
• Bank at home or anywhere/anytime
• 62% of adults list Internet banking as their preferred
banking method
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
15-36
•
Computers and
handheld
devices have
made online
banking
extremely
convenient
•
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
15-37
Future of Banking
 Advances in technology are challenging and changing
the banking industry
 During 2007-2008, 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
15-38
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.
15-39
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.