Financial Institutions- 02/21/17

Financial Institutions- 02/21/17

Purposes of Financial Institutions
1) store money
2) save money
-savings account, checking account, CDs, money market account
3) loan money
-interest: price paid for the use of borrowed money
-principal: amount that you borrow

Types of Financial Intermediaries
1) Commercial Bank
2) Savings and Loans Institution
3) Credit Union
4) Mutual Fund Companies
5) Finance Companies

The Financial System:
-Assets: anything of monetary valued owned by a person or a business
-Financial Assets: a paper claim that entitles the buyer to future income from the seller
-Physical Assets: a claim on a tangible object
-Liability: a requirement to pay money in the future

Five Major Assets
1) Loans
2) Stocks
3) Bonds
4) Loan-based Securities
5) Bank Deposits

Interest Rates and Inflation:
-The time value of money: a dollar is worth more today than it is tomorrow
-You are losing money every second you’re 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 (lend) money to someone, it will compound (grow) according to the following equation:
-FV = PV(1+i)^t
-Present Value: the amount of money I need to invest now, in order to get some amount in the future
-PV = FV/(1+i)^t

The Simple Interest Formula
-V = (1+r)^n * P

The Compound Interest Formula
-V = (1+r/k)^nk * P