UNIT 4 Money, Banking, and Finance (Chapters 10-11) IMPORTANT TERMS Money Anything that serves as a medium of exchange, a unit of account, and a store of value. Medium of Exchange A quality of money that’s used to determine the value during the exchange or goods and services. Barter The direct exchange of one set of goods or services for another—exchange without money. Unit of Account A quality of money that serves as a means for comparing the values of goods and services. Store of Value A quality of money that suggests money keeps its value if it is stored rather than used. Currency The coins and paper bills we use as money. Commodity Money Objects that have value in and of themselves and that are or have been used as money. Representative Money Objects that have value because the holder can exchange them for something else of value— money. Fiat Money Also known as “legal tender”. Has value because the government says that it is an acceptable means to pay debts. Bank An institution for receiving, keeping, and lending money. National Bank A bank chartered or licensed by the national government that could use a single currency from the entire nation, manage the federal government’s funds, and monitor other banks throughout the country. Bank Run Widespread panic in which many people try to redeem their paper money from a bank. Greenbacks Paper currency issued by the North during the Civil War. Gold Standard A monetary system in which paper money and coins are equal to the value of a certain amount of gold. Federal Reserve System The nation’s central banking system. Central Bank A bank that can lend to other banks in time of need. Member Banks Banks that belong to the Federal Reserve System. Federal Reserve Notes Legal tender that allows the Federal Reserve to increase and decrease the amount of money in circulation according to business needs. Great Depression The severe economic decline that began in 1929 and lasted more than a decade. Federal Deposit Insurance Corporation A government institution that insures customer (FDIC) deposits up to $250,000 in the event that a bank fails. Money Supply All the money available to the United States economy. Liquidity The ability of an investment to be used as, or directly converted to, cash. Demand Deposits The money in checking accounts. Money Market Mutual Funds A fund that pools money from small savers to purchase short-term government and corporate securities. Fractional Reserve Banking A banking system that keeps only a fraction of funds on hand and lends out the remainder. Default The failure to pay back a loan on time. Mortgage A specific type of loan that is used to buy real estate. Credit Cards Cards entitling their holders to buy goods and services based on the cardholder’s promise to pay for these goods and services. Interest The price paid for the use of borrowed money. Principal The original amount of money borrowed. Debit Cards Bank-issued cards used to withdraw money an ATM or to buy goods in stores that are equipped with special machines. Creditor A person or institution to whom money is owed. Investment The act of redirecting resources from being consumed today so that they may create benefits in the future. Financial System A method by which a nation’s savers and borrowers can transfer money between them. Financial Assets Claims on the property or income of a borrower. Financial Intermediaries Institution that help channel funds from savers to borrowers. Mutual Funds A financial instrument that pools the savings of many individuals and invests this money in a variety of stocks, bonds, and other financial assets. Diversification The strategy of purchasing many different types of investments—stocks, bonds, CDs—to reduce risk. Portfolios The entire collection of an investor’s financial assets, including stocks, bonds, savings accounts, etc. Prospectus An investment report to potential investors. Return The money an investor receives above and beyond the sum of money initially invested. Coupon Rate The interest rate that a bond issuer will pay to a bondholder. Maturity The time at which payment to the bondholder is due. Par Value The amount that an investor pays to purchase a bond and that will be repaid to the investor at maturity; also called “face value of principal”. Yield The annual rate of return on a bond if the bond were held to maturity. Savings Bonds Low-denomination ($50- $10,000) bonds issued by the United States government. Municipal Bonds Bonds used to finance local government improvements like highways, schools, and parks; also known as “munis”. Corporate Bonds A bond that a corporation issues to raise money to expand its business; they are issued in fairly large denominations, such as $1,000, $5,000, and $10,000. Securities and Exchange Commission An independent government agency that (SEC) regulates financial markets and investment companies. Junk Bonds These are high-yield securities (corporate or municipal bonds), usually lower-rated (riskier), but with the potential to be higher-paying than other investments. Capital Markets Market in which money is lent for periods longer than a year. Money Markets Markets in which money is lent for periods of less than a year. Primary Markets Market for selling financial assets that can only be redeemed by the stockholder. Secondary Market Market for reselling financial assets. Shares A portion of stock; the number of shares owned indicates the percentage of ownership an investor has in a company. Equities A claim of ownership in a corporation. Capital Gain The difference between the higher selling price and the lower purchase price. Capital Loss The difference between a lower selling price and a higher purchase price, resulting in a financial loss for the seller. Stock Split Where each single share of stock splits into more than on share. Stockbroker A person who links buyers and sellers of stock. Brokerage Firms Businesses that specialize in trading stocks. Stock Exchange Markets for buying and selling stock. OTC Market The over-the-counter market is an electronic marketplace for stock that is not listed or traded on an organized exchange. Nasdaq (the National Association of The American market for over-the-counter Securities Dealers Automated securities. Quotations) Futures Contracts to buy or sell commodities at a specific date in the future at a price specified today. Options Contracts that give investors the choice to buy or sell stock and other financial assets. Call Option The option to buy shares of stock at a specified time in the future. Option The option to sell shares of stick at a specified time in the future. Bull Market A trend when the stock of market rises steadily over a period of time. The Dow An index of stock prices of thirty large companies in various industries that has shown these stocks have traded since 1896; the Dow indicates how the stock market in general is performing. S & P 500 (Standard & Poor’s 500) An index of stock prices of 500 different stocks as a measure of overall stock market performance; it gives a broader picture of stock performances than the Dow. Great Crash The collapse of the stock market in 1929. Speculation The practice of making high-risk investments with borrowed money in hopes of getting a big return.
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