03/14/16

    UNIT 4: Money

Types of Money

 -Commodity Money: It gets its value form the type of material from which it is made

Ex: Gold & Silver coins

-Representative Money: It is paper money back from something tangible that gives it value

Ex: IOU Money

-Fiat Money: Money basic the government "said so"

   Characteristics of Money

-Divisible: break the dollar bill into many ways.

-Portable: Put your money in socks, bra

-Uniform: A dollar it’s a dollar, doesn’t matter if you change the president but a dollar is a dollar.

M1 Money: 

-75 percent of money that comes from circulation comes from here (It is liquid- easy to convert)

-Cash and coins >Currency

-Checkable deposits >Demand deposits 

-Traveler’s checks

M2 Money:

-Consists of M1 Money, Savings accounts, and deposits held by banks outside of the USA

-Saving Account is not a transaction where you can’t pull out ( Only transfer from the saving to checking account)

M3 Money:

-Consists of M2 Money and certificated of deposit money know as CD’s

-CD’s are accounts that apply the concept of keeping money over a period of time, then that money will grow.

Time Value of Money

-A dollar today is worth more than a dollar tomorrow

Why?

  - Opportunity cost & inflation

  - This is the reason for charging and paying interest

How to Calculate 

- Let:

     V = future value of money

     P = present value of money

     r = real interest rates (nominal rate- inflation rate)

     n =  years

     k = number of times interest is credited per year

The Simple Interest formula

v= (1+r)^n *P

Compound Interest Formula

v= (1+ r ) ^nk * P