Unit 5 – Financial Literacy
MONEY
 Money is anything that people will accept as payment for goods and services and it should perform
three important functions:
1) Medium of Exchange- the means through which goods and services can be exchanged. Money
allows for the precise and flexible pricing of goods and services, making any economic transaction
convenient.
2) Standard of Value - it allows people to measure the relative costs of goods and services. We can
compare the price of one good to another. $10 hat = 10 one dollar Cheeseburgers.
3) Store of Value - something that holds its value over time. You do not need to spend all your money
at once or in one place because it still has value later on.
-Characteristics of MoneyMoney is & must be:
1) Durable- withstands wear & tear.
2) Portable- able to transfer easily.
3) Divisible- able to divide into smaller units to make change.
4) Uniform- have a stable value. Money must be uniform in that one $20.00 bill and another $20.00 bill
must be able to buy the same thing.
5) Acceptable- universally used and easily recognizable.
6) Limited supply{Scarcity}- too much currency creates inflation – loses its value.
-Types of Money Commodity money - items which have value on their own, based on the material from which
it is made (examples: gold, salt, silver, gems).
 Representative money: Items by nature that have no value, but can be exchanged for valuable
goods(coupons, checks, gift certificates, an IOU and paper money).
 Fiat money: Money that only has value because of a gov’t order
 Money supply means all the money available in America. It’s divided measured into M1 and M2.
-Money Supply – M1 M1 is money you can easily get to and use.
 They are liquid assets - Liquidity refers to any asset that can be used as cash or converted easily
into cash.
Ex-( checking , All physical money, and traveler checks)
 Demand deposits: Checking accounts are called demand deposits because funds in checking
accounts can be converted into currency on demand.
-Money Supply – M2 M2 includes M1money and near money.
 Near money- savings accounts and other similar time deposits that cannot be used as a medium of
exchange but can be converted into cash.
Ex- (Time deposits, Savings accounts, Mutual funds)
-Department of Treasury It was established by an Act of Congress in 1789 to manage government revenue .The Treasury
Dept prints and mints all paper currency and coins. Then it’s circulated by the Federal Reserve
district Banks.
 Currency: paper money and coins used in the money supply.
 Coins are made at the US Mint.
 Federal Reserve Notes (Paper currency) is printed at the Bureau of Engraving & Printing.
 Since the 1930’s the US gov’t won’t covert paper currency into gold or silver. Also the
government now issues currency equal to the Gross Domestic Product (GDP), or the amount
of goods and services produced in the United States in one year.
 The Federal Reserve shreds 7,000 tons of worn out currency each year.
 Overall the average life span for all bills is about five years.
Banking in America
 Banks – Institutions for receiving, keeping and lending money.
-History of American Banks After the Revolutionary War 1776, many state banks—chartered, or licensed, by state gov’ts - were
established. Some of these banks, followed practices that tended to create instability and disorder.
 In 1791, Alexander Hamilton, the first Secretary of Treasury developed The First Bank of the United
States. The bank was headquartered in Philadelphia, with branches in eight cities. It was set up with
capital of $10 million. The National bank issued a national currency and help control the money supply
by refusing to accept currency from state banks that was not backed by gold or silver.
 In 1811 Congress refused to renew the National banks charter and the country ran into financial
problems during the War of 1812.
 In 1816, The Second Bank was similar in structure to the First Bank, but had capital of $35 million. It
was not run as well as the first one.
 President Andrew Jackson was an outspoken critic who mistrusted banks and paper money, so he
vetoed the renewal of its charter in 1832.
 During the years that followed, all banks were state banks, each of which issued its own paper currency,
called bank notes. States passed free banking laws that allowed individuals or groups that met its
requirements to open banks.
 The Civil War was particularly difficult for the government to finance its operations without a national
currency and a federal bank.
 In 1863, Congress passed the National Banking Act, which led to the creation of a system of national
banks.
 In 1900, the gov’t officially adopted the gold standard —for example, one dollar—is equal to a set
amount of gold. The national currency and gold standard helped to bring some stability to the banking
system.
-FINANCIAL INSTITUTIONS They are firms that deal with money between borrowers and savers, and include commercial banks,
savings and loans, credit unions, and finance companies. Government regulations set the amount of
money the owners of a bank must invest in it, the size of the reserves a bank must hold, and the
ways that loans may be made.
1. Commercial Banks Privately owned and work with small and large businesses.
 The Banking Act of 1933 allowed them to provide basic banking services: checking and savings
accounts, safety deposit boxes, and mortgages to people & businesses.
 During the 1980’s the Gov’t deregulated the banks, now they also can give loans, give investment
assistance and credit cards.
2. -Investment Banks Savings and Loan associations (S&Ls) primary purpose is savings accounts and mortgages. Also
they provide assistance with investments, but they also offer many services provided by
commercial banks.
 Many savings institutions raise financing through the sale of stock, just as commercial banks do.
3. -Credit Unions Credit unions credit unions tend to be locally owned and operated, savings and lending institutions.
 They are nonprofit organizations owned by the “members”. Large companies, labor unions or other
organizations may own credit unions.
 Same services as Commercial banks, but lower loan rates & higher savings rates.
.
 Deregulation in the 1990s allowed credit unions to expand their membership qualifications
Federal Reserve
-Federal Reserve In 1913 President Woodrow Wilson urged Congress to pass the Federal Reserve Act.
 It’s an independent organization within the government - decisions are not ratified by the President or
Congress.
 The Act established the Federal Reserve System, which centralized all US banks
 The Federal Reserve Act created the system of a fed bank lending money to other banks.
 There are 12 districts with member banks.
 The central bank is known as “The Fed” or Reserve banks.
 The Board of Governors is a board of seven appointed members who supervise the operations of
the
Fed and set policy. The president appoints members for a single 14-year term, with the approval
of the Senate.
What does the Federal Reserve do?
1) Provides financial services to the Federal government:
a. It serves private banks and the government rather than individual customers and businesses.
b. Deposits the tax revenues the IRS collects.
c. Pays the government’s bills such Social Security, Medicare, and IRS tax refunds.
d. Charges banks interest for their loans
e. Buys & sells government securities(Treasury Bills, Bonds, & Bank notes)
2) Holds cash reserves:
a. Central Banks stores excess cash for banks.
b. Re-supplies banks with money - banks pay them a fee for it.
a. Destroys mutilated money
3) Maintains national financial stability
a. Controls the money supply
b. Federal Reserve Notes are the official U.S. paper currency.
c. It’s a regulatory agency that regulates and supervises banks.
d. A bank exam is an audit of the bank’s financial practices.
-Federal Depositor’s Insurance Corporation {FDIC} Banks are not allowed to loan out all the money they have in deposits. The Fed establishes a
required reserve ratio (RRR), banks have to keep only a fraction of the funds in reserve and loan out
the rest.
 Federal Deposit Insurance Corporation (FDIC) provided federal insurance, so if a bank fails, people
won’t lose all their money.
 Enacted as part of President Franklin Roosevelt’s New Deal program in the 1930s.
 The Federal government protects bank deposits up to $250,000 per depositor in the event the bank
goes out of business.
 FDIC insurance covers all deposit accounts, including: Checking accounts, savings accounts, Money
market deposit accounts and Certificates of deposits.
Loans and Credit
How do banks earn revenue? By lending money & collecting interest on loans
 A loan is a sum of money borrowed to be paid back with interest.
a) Consumer loans, used by consumers to pay for goods and services over time
b) Commercial loans, used by businesses to buy resources, equipment, and more.
 The amount borrowed is known as the principal. Interest is a fee payed to use the banks money.
 Interest is the banks largest source of income.
 Banks lend money to borrowers and charge a higher interest rate.
 The extra interest collected from loans & credit cards equals’ revenue for banks.
The FED sets Interest rates:
- Set by the Open Market Committee of the Federal Reserve Board.
- This rate is used to stabilize the economy and it determines bank lending rates.
1. Discount rate:
- The rates banks are charged to borrow from the Federal Reserve.
2. Prime rate
- The interest rate banks charge their best customers (large corporations.) Lower than ordinary loans
or credit card rates.
-Borrowing Money MORTGAGE,
 Special type of loans that is related to real estate (15 or 30 years).
 There is an extensive credit, income, & employment research.
 Fixed rate – interstate rates don’t change during loan
 Adjustable rate – Interest rates change periodically.
 Closed term - paid off in a specific time
 Equity Loan – a line of credit allows you to borrow money, using your home's equity as collateral
known as second mortgage

Student Loan Money borrowed from the gov’t usually with low interest rates.
 Usually 10 to 20 years terms, delayed payments until you graduate.
 Stafford loans – 6.8% rate - All students who need – 10 years to repay.
 Perkins loan – 5% rate – All students who need - years to repay.
 Pell Grant – you don’t pay it back!
-DEBIT/ CREDIT CARDS CREDIT Cards:
- Small installment loans from companies like Visa& Master cards
- Varying line of credit and interest rates – around 14%.
- No deadline for repayment.
- Issued based on past credit history & ability to re-pay.
 DEBIT Card:
- ATM or check-card{can be used like checks to make purchases}
- Used to withdraw funds directly from existing account.
- Access from ATM machines
Financial Investments
•Financial Assets, A resource with economic value, usually represented by some type of contract. Unlike
land and property--which are tangible, physical assets--financial assets do not necessarily have physical
worth. Examples: Stocks, bonds, bank deposits.
 Securities and Exchange Commission monitors investment companies.
-What can you do with your income?
• Savings- income not spent on wants or needs (When you save you are in essence lending
money to banks).
• Investments- directing today’s income for future profits (money lent to businesses).
 Disposable Income- money left over after taxes or bills have been paid.
-Reasons to save….• Major purchases
• Large annual/ semi-annual bills
• Unexpected expenses
• Major long term expenses
• To gain wealth
• Retirement/ leave an inheritance
-How most Americans save and Invest1. Regular Savings accounts:
- small balances and risk free
- funds are liquid.
- liquidity refers to any asset that can be
used as cash or converted easily into cash.
- pays a small amount of interest ( .1%).
2. Money Market accounts:
- offers the account holder benefits typical of
both savings and checking accounts.
- higher balance required & limited access.
- bank invests funds in high paying
investments.= ( .8%)
3. TIME DEPOSIT ACCOUNTS Are:
- A time deposit is an interest-bearing bank deposit that has a specified date of maturity.
- larger balance requirements
- Strictly limited access
- Higher interest earned
- Risk-free
 Types of TIME DEPOSIT ACCOUNTS:
(A)…CERTIFICATE OF DEPOSIT (CD)
 A fixed opening deposit.
 Multiple interest rates, due to time.
 longer term, equals higher rate - usually 6 months to 5 years
 Maturity- the due date you can collect your money earned.
 100,000 or more is insured by the gov’t
(B)…INDIVIDUAL RETIREMENT ACCOUNTS (IRA)
 Long term retirement savings.
 Max $5,000 a year deposit.
 Limited access (not until your 59 ½)
 Can only deposit earned income.
 Funds may or may not be taxed on withdrawal.
(C)… 401K ACCOUNTS
 It works just like an IRA
 A retirement plan through your employer.
 Can save up to 6% of your income
 Employer matches your savings
 Money may be lost if mis-managed
Bonds and Stocks
 Mutual Fund - An investment vehicle that is made up of a pool of funds collected from many investors
for the purpose of investing in securities such as stocks, bonds, money market instruments.
-Bonds Bonds are promissory loans; when an investor buys bonds, he or she is lending money. Bonds are
used by companies, municipalities, states and sovereign governments to raise money and finance
a variety of projects and activities.
 Municipal Bonds = State and local Gov’t.
 Corporate Bonds = Issued by businesses.
-SAVINGS BONDS:
 Par Value is the amount you put down for the Bond.
 Holder is the investor who buys the bond
 Return - The money you earned above your initial investment.
 Maturity is the date when the bond is due to be repaid.
 Bought for ½ face value {$25 = $50}.
 Long term maturity, can be bought or sold.
 Interest still earned after maturity, if not cashed out.
 Interest is taxed when redeemed.
 Junk bonds are high risk, high-yield corporate bonds.
-Treasuries = T-BILLS, T-BONDS, T-NOTES:
 It’s like a savings bond, but it’s an investment in our Federal government.
 T-Bills, T-Bonds and T-Notes are only different in Investment: the Amount and Time.
(T-bonds are long … T-Notes are intermediate… T-bills are short)
 America is in debt today due to the money owed because of these types of investments.
-DIVERSIFICATION Nobel Prize winning concept by Harry Markowitz in the 1970s.
 Should spread out investments to reduce risks.
 Intelligent investors will invest in CDs, bonds, mutual funds, stocks, and savings accounts.
 Portfolios, a collection of your financial assets.
-Buying and Selling Stocks-What are stocks?
 A stock is a certificate showing you own a share of a corporation.
 A share is the smallest unit of stock.
 Initial public offering, or IPO, this is the stock sale that raises money for the corporation.
-Corporations sell stocks
 Corporations who trade must meet financial standards:
- Corporate earnings
- Accounting practices
- Shares offered
 After the “Initial Public Offering” (IPO), stocks are bought and resold from other stockholders (a stock
exchange).
 Large corporations pay for a “seat” on the stock exchange {Market to sell stocks} - the right to
directly sell stock.
 Most companies trade “over the counter”- indirect trading through Brokerage firms.
 Not all corporations trade publicly.
-Investing in stocks To invest is to purchase something of value in order to earn a profit over time.
 The financial earnings on an investment stock, depends on the success of the corporation.
 Stockholder becomes a part owner in the corporation.
 Stockbrokers and Brokerages charge a fee on each stock they sell.
 Investors may interact with brokers in person, by phone, or online.
-STOCK MARKET
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•
Investors buy stock for two reasons:
1) To earn dividend payments, which are a share of the corporation’s profits that are paid back to
the corporation’s stockholder periodically.
2) To earn capital gains by selling the stock at a price greater than the purchase price.
a) Capital Gains - profits earned when stock is sold to another investor.
b) Capital Loss- stock is re-sold for less than the original purchase price.
c) Stock values are determined by the supply and demand for the stock.
Investing in the stock market involves high risk!!!
Speculation – making high risk investments with borrowed money.
-Two types of Stocks:
• Common stock gives shareholders voting rights and a share of profits.
• Preferred stock gives shareholders a share of profits but, in general, no voting rights.
“Stock-Split”
 At some point a stock price may become too high to attract more buyers.
 The Board of Directors decides to divide existing shares in half.
 Investors have double the number of shares & prices are adjusted at a lower level.
 In general, prices rise & total value increases.
-What is the STOCK MARKET?
 A “place” where stocks are bought & sold.
 In the US, Wall Street is the oldest and largest stock exchange. The New York Stock Exchange
(NYSE) began in 1792, when a group of 24 stockbrokers and merchants signed an agreement to
trade stocks. They met on Wall Street, which has been home to the exchange ever since
 Trades can be made in numerous locations including through the internet
 All stocks are traded through licensed Stockbrokers. In 1970, the National Association of Securities
Dealers (NASDAQ) introduced a centralized computer system that allows OTC traders around the
country to make trades at the best prices possible.
-STOCK TERMS TO KNOW AMEX- American Stock Exchange
 Standard’s & Poor (S&P 500)- tracks and grades stock performance.
 DOW JONES INDUSTRIAL- records prices of the top 30 major Companies.
 Daytraders – Using computers, they buy and sell on predictions minute by minute all day long.
 A Future is a contract to buy or sell a commodity at a specified future date and price.
 An Option gives an investor the right, but not the obligation to buy or sell stock at a future date at
a preset price.
-Bear Market An overall drop in stock prices
-Bull Market An overall increase in stock prices