AN INTRODUCTION TO MONEY AND THE

FINANCIAL SYSTEM

CHAPTER 1

THE FIVE PARTS OF THE FINANCIAL SYSTEM

MoneyFinancial InstrumentsFinancial MarketsFinancial InstitutionsCentral Bank

Financial System The financial system is the system that allows

the transfer of money between savers (and investors) and borrowers

A financial system can operate on a global, regional or firm specific level

Financial systems are crucial to the allocation of resources in a modern economy

What is Money ?Brainstorm concepts that come to

your minds when you think of “Money”

Money Any object or record that is generally

accepted as payment for goods and services and repayment of debts in a given country or socio-economic context

Money originated as commodity money, but nearly all contemporary money systems are based on fiat money

Financial InstrumentsTransfer resources from savers to

investors Transfer risk to those who are best

equipped to do it

Financial MarketsWhere buyers and sellers come

together to buy and sell financial instruments quickly and cheaply

Financial InstitutionsProvide a myriad of services,

including access to the financial markets and collection of information about prospective borrowers to ensure they are creditworthy

Banks, securities firms and insurance companies

Canada’s Big Five Royal Bank of Canada (RBC) Toronto-Dominion Bank (TD) Bank of Nova Scotia (BNS) Bank of Montreal (BMO) Canadian Imperial Bank of Commerce

(CIBC)

Central BankMonitor and stabilize the economy

Low and stable inflation rate Low unemployment rate Healthy economic

The Bank of CanadaThe Federal Reserve System (Fed)The Bank of Vietnam

The Five Core Principles Of Money And Banking

Core Principle 1: Time has value Time affects the value of financial transactions How much you willing to pay today to achieve

a certain amount of money in the future How long you want to invest your money

Core principle 2: Risk required compensation

Always assume there is risk involve in using and borrowing money

Therefore, risk requires compensation. Compensation is made in the form explicit payments

The higher the risk, the bigger the required payment

Core principle 3: Information is the basis for decisions

Collection and processing of information Information is a key role to any financial

decision

Core principle 4: Markets set prices and allocate resources

Financial markets are essential to the economy, channeling its resources and minimizing the cost of gathering information and making transaction

Why a better developed financial market will grow the country faster ?

Core principle 5: Stability improves welfare

Reducing volatility reduces risk Fed and the European Central Bank

Inflation Increase in the general level of prices Reduces purchasing power Inflation and deflation