CHAPTER 1: AN OVERVIEW OF MONEY AND FINANCE

1.1. The nature of money

The history of money: Money is a fundamental institution that facilitates economic exchange,
reduces transaction costs, and supports the functioning of modern economies. It exists because
societies need an efficient medium to store value, measure value, and transfer value across time and
space.
The nature of money: Money is defined not by what it is physically, but by what it does.
Economists typically describe money through its three core functions:

1.2. Functions of money

Unit of account: Money serves as a standard numerical unit for measuring the market value of
goods and services. This function: provides a common measure for comparing values of different
goods, makes accounting and economic calculation possible, reduces transaction costs by simplifying
price comparisons, enables complex financial planning and analysis.

Medium of exchange: The most fundamental function of money is serving as a medium of

exchange. This function: eliminates the need for a double coincidence of needs, dramatically reduces
transaction costs, promotes specialization and division of labor, enables complex economic systems
to function. For an item to function effectively as a medium of exchange, it must be easily
standardized, widely accepted, divisible into smaller units, portable and easy to carry durable and
resistant to deterioration

Store of value: Money allows purchasing power to be preserved for future use. As a store of value
enables saving and deferred consumption, bridges the gap between income and expenditure, provides
liquidity for unexpected needs, competes with other assets (stocks, real estate) that also store value.

1.2. The evolution of the payments system

Barter System (Pre-money era): Early societies relied on direct exchange of goods and services.

Commodity money
1.3.2. Fiat money
1.3.3. Electronic money
1.4. Measuring money – The money aggregates
Definition: money is anything that is generally accepted as payment for goods and services
The money aggregates
 M1: Currency + Traveler’s checks + Demand deposits + Other checkable deposits
 M2: M1
+ Small-denomination time deposits
+ Savings deposits and money market deposit accounts
+ Money market mutual fund shares (retail)

CHAPTER 2: FINANCIAL SYSTEM

2.1. Definition: The financial system is a complex network of markets, organizations, instruments,
and regulations that enable capital transfer between savers and borrowers.
 2.2. Functions and roles of the financial system
Functions of the financial system:
+ Savings mobilization: Collecting idle funds from savers and channeling them to productive
investments
+ Resource Allocation: Directing capital to its most productive uses in the economy
+ Risk Management: Providing tools and mechanisms to identify, measure, and manage financial
risks + Payment System Facilitating transactions and the exchange of goods and services
 Serve as an important driver of economic growth and social development

The role of the financial system

Positive Impacts Negative Impacts
+ Promotes economic growth + Can cause macroeconomic instability
+ Efficient resource allocation + Creates systemic risks
+ Creates diverse investment opportunities + May exacerbate inequality
+ Effective risk management + Can create assets “bubbles”
+ Provides liquidity to the economy + May lead to financial crises

2.3. Components of the financial system

1. Financial institutions: Organizations that connect savers and borrowers, helping reduce transaction
costs and asymmetric information risks: bank, insurance companies, investment funds, creadit unions.

2. Financial market: Where financial instruments are bought and sold, connecting those who need
capital with those who can provide it
By time horizon: By Organization
+ Money market (short-term) + Organized markets (exchanges)
+ Capital market (long-term) + Over-the-counter markets (OTC)
By Nature By Instrument
+ Primary markets (first issuance) + Stock markets
+ Secondary markets (trading) + Bond markets
+ Derivatives markets

3. Financial instruments: Securities and contracts used to raise capital, invest, and manage risk
Debt Instruments Equity Instruments Derivative Instruments
+ Government bonds + Common stocks + Futures contracts
+ Corporate bonds + Preferred stocks + Options contracts
+ Treasury bills + Fund certificates + Swap agreements
+ Certificates of deposit

4. Financial infrastructure

CHAPTER 5: CREDIT AND INTEREST RATE

5.3. An overview of Interest Rate
The nature of Interest Rate: the cost of borrowing or the price paid for the rental of funds.
The roles of Interest Rate
 + Affect consumers’ willingness to spend or save: lower IR encourages consumers to spend more
(housing, automobile), whereas hgher IR can retain consumers to spend

+ Affect businesses’ investment decisions: Lower IR encourages businesses to borrow funds to invest
in expansion (new equipment, updating plants, hiring more workers), and conversely, higher IR restain
such borrowing.

Some types of interest rates in the market: fixed, variable, simple, compound interest rates
5.4. Interest rate measurement
Simple interest: calculated only on the principal amount of a loan or investment
Compound interest: calculated on the principal and also on the accumulated interest from previous
periods
5.5. Types of Interest Rates
5.5.1. Yield to Maturity
5.5.2. Rates of Return (Returns)
5.5.3. Nominal interest rate and Real interest rate
CHAPTER 6: FINANCIAL MARKET
6.1. Overview of the financial market
Definition: places where financial instruments are bought and sold.
The function of financial markets
+ Direct finance: directly tranfering capital from surplus entities to those needing capital
+ Indirect finance: tranfersing capital from surplus entities to those needing capital through financial
intermediataries.
The roles of financial markets:

6.2. Financial market participants

6.2.1. The lender - savers
6.2.2. The borrower - spenders
6.3. Financial market structures
1. Money market and Capital market (Based on time horizon)
Money markets: short-term instruments (under Capital markets: long-term instruments, facilitate
1y), provide liquidity for short-term financing investment in long-term projects and business
needs expansion
+ Treasury bills + Stocks (Common & Preferred)
+ Certificates of deposit + Bonds (Government, municipal, corporate)
+ Commercial paper + Long-term loans
+ Banker’s acceptances + Mortgages

2. Debt market and Equity market (Capital raising method)

Debt market: Where debt instruments (loans, Equity market: Where shares of joint-stock
bonds) are exchanged and traded companies are exchanged and traded
+ Borrowers: repey principal + interest + Buyers: partial owners of the company, rights to
+ Fixed income securities wwith predetermined vote and dividends
payment schedules + Return depends on company performance and
 market valuation

3. Primary market and Secondary market (Base on issuance of securities)

Primary market: newly issued securities are trades Secondary market: previouly issued securities are
+ Campanies sell directly to investors  raise trades
capital from market + Investors trade secutities with each other 
company no fund
4. Formal and Informal Market (Based on government regulation)
Formal market: fully comply with regulations, Informal market: (in contrast)
under strict sepervision of government and
financial agencies
+ Transparent operations
+ Comprehensive legal framework
+ Protected investor rights
5. Centralised and Decentralised Markets (Based on market organization method)
Centralised Market: operate according to legal Decentralised Markets: securities trading outside
regulations, where listed securities are bought and exchanges, typically for unlisted securities.
sold. + No fixed trading location
+ Fixed trading location + Transactions through computer networks
+ Specific trading times + Also known as OTC (Over the Counter)
+ Transactions through stock exchanges markets

6.4. Financial market instruments

1. Money market instruments
+ Treasury bills: government  short-term funding for state budget short-term, low risk, high
liquidity
+ Bank certificates of deposit (CDs): commercial banks  raising capital  fixed term, higher IR
+ Commercial papar: large, reputable companies  short-term funding for business operation 
short-term, unsecured
+ Baker’s acceptance: for financing internationl trade high safety, good liquidity

2. Capital market instruments

+ Stock: A certificate (or book entry) confirming an investor's ownership rights to a portion of a
company’s assets and income
+ Bond: A certificate confirming an investor's debt claim against the issuer
+ Mortgages: a loan secured by collateral, typically real estate
CHAPTER 7: COMMERCIAL BANK
7.1. An overview of commercial banks
A bank: a financial institution licensed to receive deposits and make loans.
Provide financial services: Wealth management, Currency exchange, and Guarantee.
There are several different kinds of banks: retail banks, corporate banks, commercial banks and
investment banks.
In most countries, banks are regulated by the national government or central bank.
 7.2. Function of commercial bank
Payment intermediaries: act as intermediaries in the payment system, facilitating smooth and secure
transactions across the economy.
+ Provide deposit accounts for individuals and firms to make payments
+ Execute funds tranfers, bill payments, tax payments, payroll services
+ Offer card services (debit cards, creadit cards), POS systems, QR payments
+ Support electronic payments via internet banking and mobile banking
 Reduce the use of cash, promote efficient, low-cost, safe payment methods

Financial intermediaries: Mobilize idle funds from savers and allocate them to borrowers
+ Mobilizing funds: demand deposits, saving accounts, certificates of deposit.
+ Providing credit: consumer loans, business loans, project financing
+ Investment activities: purchasing government and corporate bonds
Relocate efficiently financial resources from surplus units to deficit units, promoting investment,
consumption, economic growth

Money creation: Create deposit money through the lending process: customers deposits  keep a
portion of required reserves and lend out the remainder  new deposit  repeate process  money
creation process.
7.3. Commercial bank balance sheet
1. Assets (Use of Funds)
Reserves requirement and cash items: the most liquid assets held to meet withdrawals and comply
with central bank regulations
+ Required reserves: a portion of deposits that must be kept at the central bank.
+ Vault cash: cash held in the bank’s branches and ATMs.
+ Other cash items: checks in process of collection, cash items in transit.
 Ensure liquidity and meet regulatory compliance.

Sercurities: invest in financial securities to earn interest income while maintaining a relatively safe
and liquid portfolio (~22% of assets)
+ Government bonds: high liquid, low risk
+ Treasury bills (secondary reserves): high liquidity, low risk, low expected return
+ Money market instruments.
+ Corporate bonds (higher return, higher risk)
 Generate stable returns and manage liquidity with diversified, low-risk assets.

Loans: the largest and most profitable component of bank assets (53% of assets)
+ Commercial loans to businesses
+ Consumer loans, credit cards
+ Mortgages
+ Overdraft
 Primary source of income through interest and fees, but also the highest-risk asset category.
 Deposits at other banks
+ Interbank deposits.
+ Correspondent bank accounts used for payments and settlements.
+ Short-term placements with other banks.
 Facilitate transactions, maintain relationships, and manage short-term liquidity.

Other assets: bank buldings, computer systems and other equipments

2. Liabilities (Sources of Funds)

Checkable deposits: customers can withdraw on demand and use for payments. Demand deposit,
Negotiable Order of Withdrawal (NOW) accounts, Checking accounts. (4%)
+ Highest liquidity for customers
+ Lowest-cost funding for banks
+ Maintain reverses for withdrawls
 Core of payment systems

Non-transaction deposits: cannot be used directly for payments, more stable and long-term funding
Saving deposits, small time deposits, large time deposits (69%)  More predictable and stable, highest
cost of funding

Borrowings: borrow from external sources to cover short-term liquidity needs or expand their lending
capacity.  interbank loans (federal fund market, overnight lending, borrowing from central banks,
repurchase agreements, issuance of short-term debt instruments  provide flexible, quick, but sometimes
costly sources of funds. (12%)

Bank Capital: bank’s own financial cushion. (11%)  Shareholders’ equity, Retained earnings,
Common and preferred stock
7.4. Commercial Banking Activities
Capital raising activities: Mobilize funds to form capital base and lending resources
+ Accepting deposits: demand deposits, saving deposits, term deposits
+ Issuing financial instruments: certificates of deposits, bank bonds, promissory notes
+ Borrowing from other institutions: interbank loans, loans from central bank
+ Equity financing: issuing shares (joint-stock banks)
 Ensure sufficient and stable funding: leding, investment, liquidity needs

Capital expenditure activities: Use an allocate the mobilized capital

+ Credit provision: consumer loans, bussiness loans, morrtage loans, overdraft
+ Investment portfolios: government securities, corporate bonds, money marrket insstruments
+ Project financing and long-term lending
+ Interbank lending, other short-term placements
 Generate income for interest, feees, investment returns

Service provision activities: Non-lending service

+ Payment services: fund transfers, card services, online payments
 + Foreign exchange services: currency exchange, international remittances
+ Custodial and trust services.
+ Financial advisory and consulting.
+ Insurance and bancassurance services.
+ Safe deposit boxes and other convenience service
 Diversity income resources, enhance customer relationships, improve overall efficiency of financial
transactions
CHAPTER 8: CENTRAL BANK AND MONETARY POLICY
8.1. An overview of Central Bank
8.1.1. Historical development of Central Bank
8.1.2. Central banks’ models
8.1.3. Central bank’s functions
8.2. Monetary Policy
8.2.1. Definition
8.2.2. Goals of monetary policy
8.2.3. Tools of monetary policy