Study Plan: The Financial System

angel investors

individuals who will invest their own money in small, new companies at an early stage of development in exchange for ownership in the company

barter

trading one good or service for another

bond

a financial contract where a borrower agrees to repay the amount borrowed plus interest over a period of time in the future

bondholder

anyone who owns a bond and receives interest payments

capital gain

increase in the value of the stock (or of any asset) between when it is bought and when it is sold

central bank

the organization responsible for conducting monetary policy and ensuring that a nation’s financial system operates smoothly

certificate of deposit

a savings medium where the depositor commits to leaving an amount of money in the bank for a specified period of time.

collateral

an asset such as property promised by a borrower to protect the interests of the lender in case the borrower cannot repay their loan

commodity money

objects that have their own value in addition to their use as money

corporate bond

a bond issued by a company

corporation

a business owned by shareholders who have limited liability for the corporation’s debts

covenant

a rule included in a contract

critical thinking

obtaining, interpreting, and using information to analyze issues, make decisions, and overcome problems

cryptocurrency

a digital or virtual currency that is based on cryptography to ensure secure transactions

demand deposits

money held in accounts where the bank must give the account owner their money on demand when a check or debit card is used; also called checkable deposits

discount rate

the interest that the Fed charges banks that need to borrow money

dividend

a direct payment from a corporation to its shareholders

double coincidence of wants

two people each want some good or service that the other person can provide

equity

an ownership interest in a company

Federal Reserve

the central bank of the U.S.; also called the Fed

fiat money

money that derives value from the government that issued it

financial capital markets

a market where financial intermediaries bring together those who wish to invest money and those who wish to borrow money

financial intermediary

an institution such as a bank that operates between two parties to facilitate financial transactions

initial public offering (IPO)

the first time a corporation sells stock to the public

• IPO and any stock issued thereafter

provides funds to repay the early-stage

investors

• IPO provides the established company

with financial capital for a substantial

expansion of its operations

liquidity

how quickly a financial asset can be used to buy a good or service

M1 money supply

includes the most liquid forms of money such as cash, checkable deposits, and traveler’s checks

M2 money supply

includes M1 money in addition to other monies that are less liquid such as time deposits, money market funds, savings deposits, and certificates of deposit

medium of exchange

money acts as an intermediary between buyer and seller

mobile payments

a way of accessing financial services and conducting transactions on a mobile device

money

anything that people use to pay for goods and services and to pay people for their work

money market funds

accounts where the deposits of many individual investors are pooled together and invested in a safe way

municipal bond

a bond issued by a city

open market operations

when the Fed sells or buys U.S. Treasury bonds

private corporation

a business whose shares are not traded on a public stock exchange

regionally-based currency

currencies developed by regions such as cities or groups of communities to support local economic development

reserve requirement

the rule that members of the Federal Reserve System must hold some of their deposits in cash in their vaults or in an account at a district Federal Reserve bank

savings deposits

accounts that do not include the ability to write checks but can be accessed via ATM or withdrawal from the bank

shareholder

a person who owns stock in a corporation

shares

a fractional piece of ownership of a corporation

state bond

a bond issued by a U.S. state government

stock

a type of investment that represents ownership in a corporation

stock exchange

marketplace where anyone may purchase stock

store of value

money holds its value from day to day

time deposit

deposits at a bank or other financial institution that pay interest but cannot be withdrawn on demand

unit of account

the standard by which other values are measured

venture capital

money gathered from a variety of individual or institutional investors by a business that invests in start-ups with substantial growth potential

Early Stage Capital

business owner uses his/her own money or seeks money from an angel investor or venture capital firm

• The four main ways that businesses raise financial capital are:

• Early-stage capital: business owner uses his/her own money or seeks money from an angel investor or venture capital firm

• Profits: profits from the business are reinvested in equipment, structures, research and development, etc.

• Bonds: a way to raise capital through borrowing, used by corporations and governments; an investment for the bondholder that creates return through regular, fixed, or floating interest payments on the debt and the repayment of principal at maturity; traded on bond exchanges through brokers

• Stocks: a way to raise capital by selling ownership or equity; an investment for shareholders that creates return through the distribution of corporate profits as dividends or through gains (losses) in corporate value; traded on stock exchanges through member brokers

Key Functions of Money

1. Medium of exchange. A medium of exchange must be divisible, portable, durable, and difficult to counterfeit.

2. Store of value

3. Unit of account

3 Monetary Policy Tools

The Fed’s goals include price stability, sustainable economic growth, and full employment. It uses monetary policy to regulate the money supply and the level of interest rates. To achieve these goals, the Fed has three tools:

• it can raise or lower reserve requirements—the percentage of its funds that banks must set aside and can’t lend out;

• it can raise or lower the discount rate—the rate of interest that the Fed charges member banks to borrow “reserve” funds;

• it can conduct open market operations—buying or selling government securities (Treasury bonds) on the open market.

Business Structures Table