What do these things have in common?

What if we added these to the list?

Ummm…what?

• Porpoise teeth, rice, wheat, shells, tulip bulbs, olive oil, cattle, salt, dried fish, furs, precious stones, gold and silver?

• MONEY!!!

Money, Credit & Interest

SSEMI1

The student will describe how households, businesses and governments are interdependent and interact through flows of goods, services and money. The student will evaluate the costs and benefits of using credit.

Money is anything that

serves as a medium of

exchange, a unit of account, and a

store of value.

What Is Money?

Explain the role of money and how it facilitates exchange.

What are the 3 ways Money is used?1. Money as Medium of Exchange

– People accept money in trade for goods and services.

• Barter: Ever used this method???– Direct exchange of goods or services

What are the 3 ways Money is used?2. Money as a Unit of Account

– The value of a good or service can be measured with money.

– Ex: car with a price of $2,000 is worth twice as much as a car with a price of $1,000.

What are the 3 ways Money is used?3. Money as a Store of Value

– something that keeps its value if it is stored rather than used.

– Money can be saved and used in the future.

monetary flow

physical flow

monetary flow

physical flow

Circular Flow Diagram of a Market Economy

Households Firms

Product market

Factor market

Households pay firms for goods and services.

Firms supply households with goods and services.

Households supply firms with land, labor, and capital.

Firms pay households for land, labor, and capital.

How does Money flow in the Free Market Economy? Remember this?

• Free market economy:– households and – business firms use

markets to exchange money and products.

• Households own the factors of production and consume goods and services.

1. Commodity money consists of objects that have value in themselves.

How is Money Valued?

If cigarettes become an informal currency in prison, for example, smoking a cigarette can become a costly activity!

EX:

2. Representative money has value because the holder can exchange it for something else of value.

How is Money Valued?

EX: CHECKS!! (Your debit card.)

3. Fiat money, also called “legal tender,” has value because the government decreed that is an acceptable means to pay debts.

How is Money Valued?

$$$ Because the Government

said so!!

EX: Govt BONDS

Why is an American Dollar worth $1.00?

• In the beginning, the American Dollar was on a gold standard.– That meant the government had actual gold

stored for every dollar

• Today our money is Fiat money– It has value because the government says so.

• So what's all that stuff printed on bills?• How do we know the bill is not a fake?

What are the 6 Characteristics of Money? Write on the back of your E?s!

1. Durability: withstands wear and tear2. Portability: easily carried3. Divisibility: easily and accurately divided 4. Uniformity: each piece is the same5. Limited Supply: scarcity6. Acceptability: people accept it as money

How has Banking evolved in the 20th Century?

• The Federal Reserve Act of 1913 created the Federal Reserve System.

– The Federal Reserve System served as the nation’s first true central bank.

• The Banking Act of 1933 created the Federal Deposit Insurance Corporation (FDIC).

– Today, the FDIC insures customers’ deposits up to $250,000—per depositor.

– The nation was also taken off of the gold standard.

– Failed Bank List

What do Banks offer?1. Storing Money2. Issue Credit Cards3. Saving Money• 4 most common options:

1. Savings Accounts 2. Checking Accounts3. Money Market

Accounts4. Certificates of Deposit

(CDs)4. Loans5. Mortgages

• A mortgage: a specific type of loan used to purchase real estate

BANK

How Banks Make a Profit

Deposits from customers

Interest from borrowers

Fees for services

Money enters bankMoney leaves bank

Interest and withdrawals to

customers

Money loaned to borrowers:• business loans•home mortgages• personal loans

Bank’s cost of doing business:• salaries• taxes• other costs

Bank retains required reserves

REVIEW…How do Banks Make a Profit?• Largest source of income for banks: INTEREST from loans.

• Interest is the price paid for the use of borrowed money.

What are the different Types of Financial Institutions?

• Commercial Banks: checking services, accept deposits, and make loans.

• Savings and Loan Associations: originally chartered to lend money for home-building in the mid-1800s.

• Savings Banks: originally served people who made smaller deposits and transactions than commercial banks wished to handle.

• Credit Unions: cooperative lending associations for particular groups, usually employees of a specific firm or government agency.

• Finance Companies: make installment loans to consumers.

Automated Teller Machines (ATMs)-deposit money, withdraw cash, and get account information.

Debit Cards-used to withdraw money directly from a checking account.

Automatic Clearing Houses (ACH)-transfers funds automatically from customers' accounts to creditors' accounts.

Home Banking-allow customers to check account balances and make transfers and payments via computer.

Stored Value Cards- (GIFT CARDS) embedded with magnetic strips or computer chips with account balance information.

Banking in the Computer Age

What is Credit?• CREDIT = LOANS• company is willing to loan you money at

a set interest rate.– Credit cards are just loans

What is Interest?

• Interest how much the company is expecting you to pay for that loan.– 2 most common are simple interest and compound interest.Rate Calculator

What is Simple Interest? READ 1st!

• Borrow $100 from you …Thanks! • @10% simple interest (one set amount per year)

– $100 is the principal or borrowed amount– 10% is the interest rate

• 1 year from now calculate the interest by multiplying $100 by 10% (or .10)

• $100 x .10 = $10• Interest for the year = $10 • I now owe $110

Simple Interest (Cont.)• Simple interest the interest ($10) does not

become part of the principal ($100)• Next year when interest is calculated, still 10%

of $100 (or $10).

–Simple interest is NOT added to the principal.

–Interest generated each year canNOT get bigger.

What is Compound Interest?

• Simple interest is rarely used. (Remember how banks make money??)

• Most lenders use Compound Interest--interest is compounded or added to the principal.

Compound Interest (cont)

• Back to the $100 you lent me. Now using Compound Interest.

• 1 year from now I haven’t paid off the loan, interest is calculated again on the new principal– $110 x 10%– $11

• The $11 is then added to the principal and the new principal is $121

Simple vs Compound YearYear Amount OwedAmount Owed Interest MadeInterest Made Amount OwedAmount Owed Interest MadeInterest Made

11 $100$100 $10$10 $100$100 $10$10

22 $110$110 $10$10 $110$110 $11$11

33 $120$120 $10$10 $121$121 $12.10$12.10

44 $130$130 $10$10 $133.10$133.10 $13.31$13.31

55 $140$140 $10$10 $146.41$146.41 $14.64$14.64

66 $150$150 $10$10 $161.05$161.05 $16.10$16.10

77 $160$160 $10$10 $177.15$177.15 $17.71$17.71

88 $170$170 $10$10 $194.86$194.86 $19.47$19.47

99 $180$180 $10$10 $214.33$214.33 $21.43$21.43

1010 $190$190 $10$10 $235.76$235.76 $23.58$23.58

Loans

• Nearly everyone uses compound interest.• But they do not compound the interest every

year.

• They compound it every day.Compound Interest Calculator - WebMath

The Complicated Math…just read.

• When interest is compounded daily, it means that they add the interest to the principal every day.

• However, if the interest is 10% per year, they don’t add 10% every day, they add 10/365% every day.

• Even though this seems rather small, trust me, it makes the debt rise even faster.

Are you worthy LOAN worthy? 4 C’s of Loans

1. Capacity – your ability to pay the debt. - where you work, - how long you’ve worked there- and how much you make

Work + Time @ Work + Income = Capacity

When you apply for a loan, how do they determine if you get the loan?

Are you worthy?The four C’s determine if you get a loan:

2. Capital – Your regular income, plus the money in your savings account

Income + Savings = Capital

Are you LOAN worthy? 4 C’s

The four C’s determine if you get a loan:

3. Character – Willingness to pay debts

- They look at your past borrowing and your credit rating

When you apply for a loan, how do they determine if you get the loan?

Are you worthy?4. Collateral – Property used to secure a loan

- If you default on the loan, they get to keep the property

Credit Rating

• Credit Rating: how much (or little) of a credit risk you are based on your history.

• 3 companies (credit bureaus) in America keep track of your credit rating.– Equifax– TransUnion– Experian

• Any creditor can contact them and see all of your past credit history.– You can contact them too

But, how do I (a student) get a Great credit score????

• Credit Cards for the Newbies• What is in my credit score?

Some Terms and Stuff• Annual Percentage Rate (APR): interest rate on the

loan is in a yearly percentage rate– This does not mean it isn’t compounded daily

• Finance Charge: Some loans charge you a fee every month or year to have the service. (This fee is added into the loan.)

• Minimum Payment: Most loans require you to make a payment of a minimum amount each month.

Some Terms and Stuff

• Fixed Interest Rate: means the interest rate does not change for as long as you have the loan

• Variable Interest Rate: means the interest rate changes as the Fed changes the Prime Rate.– The is why so many houses are foreclosing right

now

Credit Cards• Serious Credit Damage

if you do not know how credit cards work!

• Every time you buy something with a credit card, the company is loaning you money at the preset interest rate (compounded daily).

Credit Cards…just read!• Credit Card company makes you

pay a minimum amount--- just barely enough so that you eventually pay off the card.

• You can---and should--- pay more than the minimum

• But they like it when you don’t. It means more interest gets compounded.

Debit Cards vs Credit Cards…more to come on this topic tomorrow.

• Debit cards are like checks– They take money from your checking account

• Credit cards are loans– They are a loan with interest that you must pay

back

Listen. New Credit Card Laws.

Now how do you use credit to your advantage?

• Complete your E?s!

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Section 1 Assessment1. Two units of the same type of money must be the same in terms of what they will buy, that is,

they must be(a) divisible.(b) portable.(c) acceptable.(d) uniform.

2. What is the source of fiat money’s value?(a) it represents the value of another item(b) government decree(c) presidential pardon(d) it is equal to the value of the stock market

Want to connect to the PHSchool.com link for this section? Click Here!

Section 1 Assessment1. Two units of the same type of money must be the same in terms of what they will buy, that is,

they must be(a) divisible.(b) portable.(c) acceptable.(d) uniform.

2. What is the source of fiat money’s value?(a) it represents the value of another item(b) government decree(c) presidential pardon(d) it is equal to the value of the stock market