E421-3 - CHAPTER 3 PRINCIPLES OF MONEY-TIME RELATIONSHIPS...

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Unformatted text preview: CHAPTER 3 PRINCIPLES OF MONEY-TIME RELATIONSHIPS MONEY Medium of Exchange --Means of payment for goods or services; What sellers accept and buyers pay ; Store of Value --A way to transport buying power from one time period to another; Unit of Account --A precise measurement of value or worth; Allows for tabulating debits and credits; CAPITAL Wealth in the form of money or property that can be used to produce more wealth. KINDS OF CAPITAL Equity capital is that owned by individuals who have invested their money or property in a business project or venture in the hope of receiving a profit. Debt capital , often called borrowed capital, is obtained from lenders (e.g., through the sale of bonds) for investment. Fi na nc ing De fini tion Ins trum en t De sc ript ion De bt fina nc ing Eq ui ty fina nc ing Bo rro w mo ne y Se ll pa rtia l ow ne rsh ip of co mp an y; Bo nd St oc k Pr om ise to pa y pr inc ipl e & int er es t; Ex ch an ge sh ar es of st oc k for ow ne rsh ip of co mp an y; Fi na nc ing De fini tion Ins trum en t De sc ript ion De bt fina nc ing Eq ui ty fina nc ing Bo rro w mo ne y Se ll pa rtia l ow ne rsh ip of co mp an y; Bo nd St oc k Pr om ise to pa y pr inc ipl e & int er es t; Ex ch an ge sh ar es of st oc k for ow ne rsh ip of co mp an y; Fi na nc ing De fini tion Ins trum en t De sc ript ion De bt fina nc ing Eq ui ty fina nc ing Bo rro w mo ne y Se ll pa rtia l ow ne rsh ip of co mp an y; Bo nd St oc k Pr om ise to pa y pr inc ipl e & int er es t; Ex ch an ge sh ar es of st oc k for ow ne rsh ip of co mp an y; Exchange money for shares of stock as proof of partial ownership INTEREST The fee that a borrower pays to a lender for the use of his or her money. INTEREST RATE The percentage of money being borrowed that is paid to the lender on some time basis. HOW INTEREST RATE IS DETERMINED Interest Rate Quantity of Money HOW INTEREST RATE IS DETERMINED Interest Rate Quantity of Money Money Demand HOW INTEREST RATE IS DETERMINED Interest Rate Quantity of Money Money Demand Money Supply MS 1 HOW INTEREST RATE IS DETERMINED Interest Rate Quantity of Money i e Money Demand Money Supply MS 1 HOW INTEREST RATE IS DETERMINED Interest Rate Quantity of Money i e Money Demand Money Supply MS 1 MS 2 i 2 HOW INTEREST RATE IS DETERMINED Interest Rate Quantity of Money i e Money Demand Money Supply MS 1 MS 2 i 2 MS 3 i 3 SIMPLE INTEREST The total interest earned or charged is linearly proportional to the initial amount of the loan (principal), the interest rate and the number of interest periods for which the principal is committed. When applied, total interest I may be found by I = ( P ) ( N ) ( i ), where P = principal amount lent or borrowed N = number of interest periods ( e.g., years ) i = interest rate per interest period COMPOUND INTEREST Whenever the interest charge for any interest period is based on the remaining principal...
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E421-3 - CHAPTER 3 PRINCIPLES OF MONEY-TIME RELATIONSHIPS...

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