March 21 2017
Purpose of Financial Institutions:
- Store Money
- Save Money
- Saving account
- Checkable Deposits
- Money Market account
- Checking account
- Loan Money
Principal - amount that you borrow
Interest - Price paid for the use of borrowed money
Types of Financial Intermediaries:
- Commercial bank
- saving and loans institutions
- credit unions
- mutual fund companies
- finance companies
The financial system
- Assets: anything of monetary value owned by a person or business
- Financial asset: paper claim that entitles the buyer to future income from the seller
- Physical asset: A claim on tangible object (ex: house or car)
- Liability: requirement to pay money in the future (usually with interest)
Five major financial assets
- Loans
- stocks
- bonds
- Loan-backed securities
- bank deposits
Interest rates and inflation
Time value of money- A dollar is worth more today than it is tomorrow. You are losing money every second you are not investing it.
- Future value (FV)- If you invest or lend money to someone it will compound/girl according to the following equation: FV = PV(I+i)^t
- Present value (PV)- amount of money you need to invest now in order to get some amount in the future. PV= FV/(I+i)^N
Formulas
Time Value of Money
- Simple interest formula
- V= (I + r) ^n • P
- Compound Interest Formula
- V= (I +r/k)^nk • P
Where r= nominal interest rate, k= Number of times interest is credited per year, n= years, and V= future value of money
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