CHAPTER ONEMONEY

What is money?
Money is usually thought of as something that is generally accepted as payment for
goods and services and for the discharge of debt.
Money has five functions:
1.
2.
3.
4.
5.

Medium of exchange.
Temporary abode of purchasing power.
Store of value
Unit of account
Standard of deferredpayment

1. Medium of exchange.
A good use as a medium of exchange in widely accepted for the payment of debt
and the purchase of goods and services, an example are currency, coins etc.
2. Temporary abode of purchasing power.
He temporary abode for purchasing power function is thus related to the medium of
exchange property and refers to the holding of money as a readily available means
of negotiating future transactions. (Share,bond, bills)
3. Store of value
The store of value function of money is not a unique function of money. One way to
store well is in the form of money. Nevertheless it is not the only way to store well.
Owing a house is also a way to store wealth.
4. Unit of account
A unit of account is a basic number in counting system. The generally accepted
practice of translating the value of all transactions, wealth and debts into a single
monetary unit of account. Measurement is a great convenience.

5. Standard of deferred payment

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Function of money merely refers to the practice of calculating debts in turn of unit
accounting used for money.

Uniformity of appearance:

Uniformity of appearance is a characteristic of money forms of money. It

can be added to the five functions of money to form a list of six commonly
described money characteristics.

What is barter economy?

Barter economy:
Barter economy is one in which goods and services are exchanged without the use
of money. Goods and services are traded for the other goods and services. No goods
value is largely our entirely related to its medium of exchange services.

Limitations of barter economy:

Double co-incidence:
It is oftenheld that in barter economy buyers and sellers are not fortunate enough to
enjoy a double co incidence in exchange and that in why money was invented. The
double co-incidence occurs when both parties do a transaction wish to buy the good
or services that the other party offers to sell in exact exchange. Thus is a barter
economy. Double co-incidence is a limitation.
Unit of account:
It is not necessary to have a physical exchange of money in order to avoid the
double- co incidence and because anthropologists and archeologists structuring
primitive communities have found evidence that in some cases the communities
developed a unit of account before they developed a physical medium of exchange.
For example: a small stack of shells.
Counting pieces:
Individuals in primitive communities could count to even very small numbers
without some device in addition to fingers and toes. The most efficient method of
counting may have been the use of some homogeneous physical commodities. The
difficulty of keeping track of the values in exchange must have been great.
Commodities that were fairly uniformed could be used for counting purposes and
become the unit of account. The more uniformed the items, the easier the were to
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understand as equal units of account. Such counting pieces may have been
important ingredients for more efficient exchange.
Physical form of money:
Commodity money:
Money may be made out of a material with a valuable alternative use. Such as gold.
This kind of money is called commodity money.
Full bodied money:
If the material out of which money is made in as valuable in other uses as it is,
when it is used as money it is called full-bodied money.
Fiat money:
Fiat money is made of a substance (USUALLY PAPER OR BOOKKEEPING ENTRY IN A
BANK ACCOUNT RECORD) with negligible value.

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CHAPTER TWO
FINANCIAL ASSET

Financial asset
Financial asset are important components of the wealth of individuals, government
and business in m0odern society and there also significant determinants of
economic activity. There is a broader group of item that has money at the
characteristics of money, called financial assets

Financial assets can be divided into three groups:

1. Bonds:
Bonds are evidence of debt. Economists often use the term bonds for all debt
instruments to signify their analysis. There are many names for particular type of
debt instruments such as bills, notes and bonds.
2. Equity:
Equity is ownership rights in business. Equity is ownership rights in business equity
share issue by corporation are called common stock.
3. Money:
Money is usually thought of as something that is generally accepted as payment for
goods and services and for the discharge of debt.

Bonds and notes:

A bond or note is part of a group of formally offered debt instruments there on
tracks that stimulates a series of fixed payments form the issues to the holder of
the bonds and notes. The payments are usually annually, semiannually or once a
year, sometimes quarterly. The final payment also includes the face value of the
bonds or note.
Bond indenture:

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Is the contract between the bond issuer and the bond holder, most bonds or notes
or bond indentures includes the following information:
1. The name of the issuer.\the face value or per value is the amount the is
obliged to pay when the bond matures.
2. The maturity date is the date of the final payment.
3. The interest payments noted on the bond are often stated as a percentage of
the face value to be paid each period. This is called coupon rate.
4. The date in which the interest payment are to be paid are indicated
5. In the cases of bonds or notes issued by corporation the trustee usually trust
company or large bank is named. The trustee must see that the issuer
comprise with the terms of bonds or note.
Bills:
A bill usually refers to a marketable debt instrument such as those issued by
Bangladesh government treasury, that matures in one year or less. They yield no
coupon payment, only a final lump-sum payment.
Assume that a $10000 a year treasury bill is sold at a five percent discount.

Stock:
Stocks are ownership rights in a corporation. The corporation charter specifies the
maximum authorized stock issues that can be outstanding.
There are two types of stock:
1. Common stock
2. Preferred stock
The common stock is the basic form of ownership allowing the holder to vote for
the directors of the corporation each share of common stock claim against current
and future earnings. Those earnings may be paid to the stock holders as dividends
or retained in the corporation and invested to enhance future earnings.
Preferred stock:
The preferred stock has no voting rights unless dividendsare not paid for a number
of periods. Preferred stock pays a fixed dividend.
Convertibles:
The privilege of converting preferred stock (convertible preferred stock) and bonds
(convertible Bonds) into common stock, at specific price is called convertibles.

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Definition of wealth:
Wealth is the stock of everything of economic value at a moment in time. Wealth is
valuable because it produces future services. There are two types of wealth:
1. Financial Wealth
2. Non-financial wealth
Non-financial wealth:
Every commodity of value in an economy is part of the stock of wealth or
equivalently. The stock of capital or assets for example: hotels, factories, land,
onions, potatoesetc. are the part of the expected output. These examples of assets
are part of the stock of non-financial wealth.
There are three general characteristics of non-financial wealth, which are given
below:

The physical condition or form of non-financial wealth I important to its value for
example: building or machinery.
The transportation cost of moving many non-financial assets are substantial. The
costs of moving a house or a machine may be large realize to its value.
The payments made for the services form non-financial wealth are part of the
societys national income.
Financial wealth:
The types of non-financial wealth differ from the types of financial wealth. The
financial wealth divides as bonds, equities and money. The importance of financial
wealth to the economy is sometimes obscured behind the maze of institutional
details. Financial wealth has three important characteristics:
Financial assets are in the physical form of paper documents, bookkeeping entries,
currency or coins.
The transportation cost squired to move a financial asset is small relative to its
value.
The income to the owner of financial wealth such as interest payments on bonds or
dividend payments on common stock is as valuable as any other income to the
owner. When the firms are transferred, no goods or services are exchanged. So, the
national income does not increased by the size of those payments.
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Liquidity:
Liquidity is a property of assets relating to the time and cost of exchanging them for
money. The transaction cost of changing an asset into money is one measure of
liquidity.

Different kinds of risk on financial assets:

There are three types of risks in firm financial asset:
Capital risk:
If the bond is sold before its matures, the price of the bond may be unexpectedly
low or equivalently the market rate of interest on bonds may be unexpectedly high.
This is capital risk.
Purchasing power risk:
Inflation could unexpectedly increase. These means that the real value of the
income form the bond unexpectedly declines. This is called purchasing power risk.
Default risk:
The bond may pay less than the expected nominal income in the case of a bond
that pays fixed money return this is called a default risk.

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Chapter 4
Real interest rate
Real interest rate:
The value of measuring unit- a dollar- is adjusted for any expected inflation or
deflation which is called real variables. Example: one could say that the only
hundred thousand dollar rental apartment produces output at the real rate of
interest. Thus the equibrilium real rate of interest. The nominal interest rate is the
rate of interest on the bond which includes a premium for expected inflation.
Suppose, the $100000 apartment produces $10000 per year. Here the real interest
rate is 10% moreover newly expected 5% inflation in measure here the nominal
interest rate could equal:
A 10% real return on it did with no inflation plus,
A 5% extra return to cover expected inflation. Therefore nominal yield (interest rate)
could be 15%

Nominal interest rate=Real interest rate+ Expected inflation .

Risk premium:
Default risk is that the issues of the bond may fail to make all the payments. A risk
premium is paid to the buyer of the instrument for bearing the default risk.
Savings and investment:
Let, Y is the dollar expenditure on output or national income for the whole economy.
The expenditures on national income are either for consumption(C), goods and
services that are used up during the year, or for investment (I), goods that are not
used up during the year. The basic income identity is by the definitions,

Y =C + I
Saving is that part of the income from providing the output that is not used for
consumption.
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S=Y C
If the consumption is subtractedfrom each side of equation (1)

Y C=I
It is plain by the comparison of the equation (2) and (3)

S=I

This identity reflects the fact that if income received for producing national
income is greater than consumption, some of the national income is held
for the future periods.

The demand and supply loanable fund:

The demand for loan fund consists first, of desired investment and second of
increase in the demand for money buy individual corporation of government
Creation of the money supply is a major part of the subject of money and banking
both the government and private banking system require money.
The demand for loans in each period can be greater than desired investment by the
amount by which individuals, corporation and government, wish to increase their
holding of money.
Also the supply of loans can be greater in each period by the amount by which the
money supply increased
Therefore the demand and supply of loanable funds must include not only desired
saving and desired investment but also desired changes in money holdings and
money supply.
Explain it in graph:

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The demand and supply of loanable funds are explain in the given
between:
The supply schedule

SL

slopes up where on the grounds that more will be said

(at a given level of income and prices) when the reward (the interest rate) is higher
the demand schedule

DL DL

slopes down downward on the assumptions that:

1. With a given stock of wealth and a given level stock of prices more
investment opportunity are profitable at a lower rate of interest
2. There will be a greater demand to increase money holdings when interest
rates all alternative assets. Such as bonds.
The equilibrium of interest rate i2 in the figure equals the amount of loanable
funds supplied with those demand.
At a higher interest rate, such as i3, then would be and supply of loanable funds and
excess supply of loanable funds and interest rate would drop, at a lower interest
rate such as i1, there would be an excess demand and interest rate would rise then
things being the same, the following changes will ethically shift the demand for
loanable funds, DL to the right and increased the nominal interest rate1. An increased demand for investment at each interest rate.
2. An increased demand for money at each interest rate
Other things being same the following changes will also initially increased the
nominal interest rate by shifting the supply of loanable funds, to the left1. A decrease demand for savings at each interest rate.
2. A decreased income money supply because of actions by government.

The result of inflationary expectation on interest rate:

S'l
D' l
Dl
nominal interest rate

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Sl

i1
D' l
i2

S'l
Sl

Dl

nominal interest rate

Loanable funds per period

Figure: the demand and supply of loadable funds adjusting to the
expectation of money rapid inflation

If there is a sudden of inflation it insured that there is no prior adjustment where

made, seems the inflation of assume are anticipation
The adjustment is shown:
The ethical equilibrium at interest rate

i1

saver will be unwilling to long out the

same amount of money at interest rate that they were before they expected
inflation. Another way of saving this is that the bond buyer will demand their
interest on their bond. To cover the interest on their interest income for expected
inflation. The supply of loanable fund

SL SL will shift to the left

SL SL

Browse will also recognized the effect of inflation that will increases there money
income and the amount fund. They need to finance their investment. They will
riveted be will icing to pay more interest on the bonds they sell. The demand for
loanable funds shifts to

D L D L

equilibrium interest rate is

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i2.

from DL DL . A full adjustment because a new

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