Unit 4: Financial Assets & The Time Value of Money 3/21/17

Purchase of Financial Institutions:
1. Store $
2. Save $
   -Savings acct
   -Checking acct
   -CD
   -Money market acct
3. Loan

Interest: Price paid for the use of borrowed money.
Principal: Amount that you borrow.

Types of Financial Intermediates:
1. Commercial Banks
2. Savings + Loans institution
3. Credit Unions
4. Mutual Fund Companies
5. Finance Companies

The Financial System:
Assets- Anything of monetary value owned by a person 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 w/interest)

5 Major Financial Assets:
1. Loans
2. Stocks
3. Bonds
4. Loan-backed securities
5. Bank Deposits

Interest Rates & Inflation:
Time value of money: A dollar is worth more today than it is tomorrow. You are losing money every second you are not investing it.

Present Value vs. Future Value:
-Future Value: If you invest (or lend) money to someone, it will compound (grow) according to the following equation:
 FV = PV (I + i)^t
-Present Value: The amount of money I need to invest now, in order to get some amount (FV is known) in the future.
PV =      FV      
          (I + i)^N

The Simple Interest Formula:
V = (I + r)^n * p

The Compound Interest Formula:
V = (I + r/k)^nk * p

V: Future Value of $
P: Present Value of $
r: real interest rate(nominal rate-inflation rate)
n: years
k: # of times interest is compounded per year