Financial Institutions (03/21/17)

Purposes of Financial Institutions:

a. Store $

b. Save $

- savings account
- checking account
- CD
- money market

c. Loan $

Interest- price paid for the use of borrowed money

Principal- amount that you borrow

Types of Financial intermediaries:

Credit Union

1. Comercial Bank
2. Savings + Loans Institutions
3. Credit Union
4. Mutual Fund Companies
5. Finance Companies

The Financial System

Assets: Anything of monetary value owned by a peerson or business.

• Financial Asset- a paper claim that entitles the buyer to future income from the seller
• Physical Asset-  a claim on a tangible object (ex: house, car)

If you go to your bank and take out a loan ... the bank has created a Financial Asset 

You have created a Liability

Liability - a requirement to pay money in the future ( usually with interest)

• There are 5 major financial assets: Loans, Stocks, Bonds, Loan-backed securities and bank deposits.

The Time Value of Money - A dollar is worth more today than it is tomorrow, you are losing monry every secon you are not investing it.

Present Value Vs. Future Value

FV = Future value   PV = Present value   i = Nominal Interest rate   t = time

Future Value: If you invest( or lend ) money to someone 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 ( FV is Known) in the Future.

 PV = FV/( 1 + i  )^N

Time Value of Money

v = FV  p = PV  k = number of times interest is credited per year   n = year r = real interesst rate

• The Simple Interest Formula

v = (1 + i )ⁿ * p

• The Compound Interest Formula

v = (1 + r/k )^nk    * p