3/21/17
- Purpose of financial institutions:
- Store $$$
- Save $$$
- Savings account
- Checking account
- CD
- Money market account
- Loan $$$
- House
- Car
- Business
- Principal-amount of money that you borrow
- Interest – price paid for use of borrowed money
- Types of financial intermediaries:
- Commercial bank
- Credit unions
- Savings and loans institutions
- Mutual fund companies
- Finance companies
- Assets- anything of monetary value owned by a person/business. What you OWN. There are two types:
- Physical- claim on a tangible object
- Financial- paper claim that entitles the buyer to future income from the seller
- Liability- A requirement to pay money in the future (usually with interest). What you OWE.
- If you go to the bank and take out a loan, the bank has created a financial asset, you have created a liability.
- There are five major financial assets
- Loans
- Stocks
- Bonds
- Loan-backed securities
- Bank deposits
- The 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 – if you invest or lend money to someone, it will compound according to the following equation:
- FV=PV(1+i)^t
- Present value – is the amount of money I need to invest now in order to get some amount in the future:
- PV=FV/(1+i)^N
- Simple interest formula:
- V=(1+r)^n *p
- Compound interest rate:
- V=(1+r/k)^NK *p
- Variables:
- V= future value of money
- P= present value of money
- R= real interest rate
- N= years
- K= number of times interest is credited per year
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