Introducing Money and Interest Rates

CHAPTER 2
Introducing money and Interest rates
Money- Any item or commodity that is generally accepted as means of payment for goods or
services.
Fiduciary basis- Relying on the public's confidence in the established form of monetary
exchange.
CHARACTERISTS AND KEY FUNCTIONS OF MONEY

1. Store of value- money acts which people can store their wealth for future use.
2. Item of worth- money has an intrinsic value.
3. Means of exchange- it must be possible to exchange money freely and widely for goods
and its value should be as stable as possible.
4. Unit of account- Money can be used to record wealth, possessed, traded or spent
personally or nationally.
Money can also be useful because of its ability to serve as a standard of deferred payment.
Barter-direct exchange of goods and services.
THE MONEY SUPPLY

M1-the narrowest measure of the money supply, it includes currency.
M2- An addition to M1, it includes savings, deposit and money market deposit.
M3- primarily refers to money used as unit of account, it includes the financial institution.
L- Includes liquid and near-liquid assets.
SOURCES OF DEMAND OF MONEY

1. Transaction demand- Money demanded for day-to-day payments.
2. Precautionary demand- results of anticipated payments.
3. Speculative demand- money demanded because of expectations about interest rates in the
future.
Rate of interest- The price paid in the money market for the use of money. The rate is the
percentage of the amount of money borrowed.
Quantity theory of money- holds the changes in the money supply MS directly influences
the economy's price level.
Interest- defined as the cost of using money over time.
Present value- cash paid to you now will be less valuable to you than a peso paid today.
Simple loan- lender provides amount of funds that must be repaid to the lender at the
maturity date.
COMPONENTS OF MONEY INTEREST

1. Pure interest- real price once must pay for earlier availability.
2. Inflationary premium- reflects the expectation that the loan will be repaid.
3. Risk premium- the probability of default.
Short term interest rate- loans with a relatively short length for repayment.
Long-term interest rates- loans with a relatively long length for repayment
CHAPTER 3
Introducing the payment system: an overview
Payment system- Mechanism facilitates in conducting financial transactions.

Commodity money- the goal used as money that has the value independent of its use as
money.
Fiat money- refers to money, such as paper currency that has no value apart from its use as
money.
Automated Clearing House (ACH) - Transactions include direct deposits of pay roll checks
into the checking amount of workers.
E-money – Electronic money which is also refer to as digital cash used by people to buy
goods and services.
Bitcoin- a new form of e-money.
Blockchain- allows individuals and businesses around the world to settle transactions
instantly and securely on encrypted files. It is also a distributed ledger, or an online network
that registers ownership.
CHAPTER 4
Financial instruments
Financial instruments- any contract that gives rise to financial asset of one entity and
financial ability or equity instrument of another entity.
Contract- it is an agreement between two or more parties that has clear economic
consequences
Derivatives- a financial instrument that 'derive' their value on contractually required cash
flows from some other security or index.
EXAMPLES OF DERIVATIVES (FC,FC,CO,FCF,IRS)

1. Future contracts- is an agreement between a seller and a buyer that requires that a seller
to deliver a particular commodity, designed at a future date.
2. Forward contracts- almost similar to future contracts.
3. Call options- options, give its holder the right to either buy or sell an instrument.
4. Foreign currency futures- foreign loans are denominated in the currency of the lender.
5. Interest rate swaps- contracts to exchange cash flows as of a specified date or as series fo
specified dates based on a notional amount and fixed floating rights.
CHAPTER 5
Overview of financial system
Direct finance- borrower borrow funds directly from lenders in financial markets by seling
them securities.
3 KEY SERVICES
1. Risk sharing- risk is the chance that the value of financial assets will change relative to
what one expects. Splitting wealth into many assets to reduce risk is known as
diversification.
2. Liquidity- is the ease with which an asset can be exchange for money.
3. Information- facts about borrowers.
Asymmetric information- describes the situation in which one party to an economic

transaction has better information than does the other party.
Adverse selection- This is the problem investor experiences in distinguishing low-risk
borrowers from high-risk borrowers before making an investment.
Moral hazard- This is the problem investors experience in verifying that borrowers are using
their funds as intended.
CHAPTER 6
The Philippine financial system
I. Bangko Sentral ng Pilipinas

II. Banking institution
A. Private banking institution
1. Universal bank- any commercial bank.
2. Commercial bank/domestic bank- confined only to commercial bank functions.
3. Thrift Banks- includes savings and mortgages banks, loan association and private
development bank.
4. Rural bank- authorized to accept deposits and make credits available to farmers.
5. Cooperate banks- established to assist the various cooperatives through lending.
B. Government banks
1. Development bank of the Philippines- provides loans for development purposes.
2. Land bank of the Philippines- provides financial support in CARP
3. Al-Amanah Islamic ivestment bank
III. Non-bank financial institution
A. Private non-bank financial institution
1. Investment house- engages in underwriting securities of other corporation.
2. Investment banks- they do not take in deposits.
3. Financing company- Primary purpose is to extend credit.
4. Security dealer- entity engaged in the business of buying and selling securities for
its own account.
5. Savings and loan association-traditionally served individual savers, residential
and commercial mortgages.
6. Mutual funds- corporations which accept money from savers and the use these
funds to buy stocks, long-term bonds and short-term debt instrument.
7. Pawnshop- refers to person engaged in the business of lending money with
personal property, jewelry etc.
8. Lending investor- refers to person engaged in the business of affecting securities
transaction.
9. Pension funds- retirement plans funded by corporations or government agencies
for their workers.
10. Insurance companies- take savings in a form of annual premium.
11. Credit unions- are cooperative associations whose members have a common
bond, such as being employees of the same firm.
B. Government non-bank financial institutions
1. Government service insurance system- provides retirement benefits, housing
loans, personal plans and emergency loans.
2. Social security system-

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CHAPTER 2

Introducing money and Interest rates

CHARACTERISTS AND KEY FUNCTIONS OF MONEY

THE MONEY SUPPLY

SOURCES OF DEMAND OF MONEY

COMPONENTS OF MONEY INTEREST

Payment system- Mechanism facilitates in conducting financial transactions.

EXAMPLES OF DERIVATIVES (FC,FC,CO,FCF,IRS)

Asymmetric information- describes the situation in which one party to an economic

I. Bangko Sentral ng Pilipinas

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