1.Money is the stock of assets that can be readily used to make transactions.

Money is anything that is

generally accepted in payment for goods and services
In the United States:
M1 = Currency + Traveler's Checks + Demand Deposits + Other Checkable Deposits
M2 = M1 + Small denomination time deposits & repurchase agreements + Savings Deposits and money
market deposit accounts + retail Money Market mutual fund shares
M3 = M2 + Large denomination time deposits and repurchase agreements + Money Market mutual fund
shares (institutional) + Repurchase Agreements + Eurodollars.
1.1 Money: Functions
Medium of Exchange- we use it to buy stuff
Store of Value - transfers purchasing power from the present to the future.
Unit of Account - the common unit by which everyone measures prices and values.
Money helps to:
- Lower transaction costs.
- Increase Liquidity in an economy.
1.2 Money as a Medium of Exchange
- Definition: A medium of exchange is any object that is accepted in exchange for goods and services
- Examples of mediums of exchange: (Barter, Cigarettes , Credit Card.)
- Barter goods and services exchanged directly for other goods and services. (Double exchange of
Wants.)
1.3 The money supply is the quantity of money available in the economy.
Monetary policy is the control over the money supply.

2. Bond is a debt security, A bond is a formal contract to repay borrowed money with interest at fixed
intervals.
3. Security is a fungible, negotiable instrument representing financial value. Securities are broadly
categorized into debt securities.
4. A bull market is one in which prices of a certain group of securities are rising or are expected to rise. It
is a prolonged period where the investment prices rise faster than their historical average. In such times,
investors have faith that the market will continue to rise in the long term.
A bear market is an opposite of bull market; it is characterized by falling prices and an expectation that
they will continue falling. When the market is bearish, it leads to a slow down of economy together with
a rise in unemployment and inflation.
5. Debt Instrument:
1. Debt Instrument: Contractual agreement by borrower to pay holder of the instrument a fixed
dollar amount at regular intervals (principal + interest), until a specified date
2. The maturity of a debt instrument is the number of years (term) until the instrument expires
6. Classifications of Financial Markets:
1. Primary Market
- New security issues sold to initial buyers (often behind closed doors)
- Investment banks typically underwrite securities (i.e. guarantees a price for the security and then sells
it to the public)
2. Secondary Market: Securities previously issued are bought and sold (E.g.: NASDAQ, Futures,
Options, Foreign Exchange)
- Exchanges: Trades conducted in central locations (e.g., New York Stock Exchange, NYSE; London
Stock Exchange, LSE)
- Over-the-Counter Markets : Dealers at different locations buy and sell
7. Methods of Raising Private Sector Funds:
Debt Markets: -Short-term (maturity < 1 year): Money Market
-Intermediate-term (1year < maturity < 10 years)
-Long-term (maturity > 10 years)
Equity Markets -Common stocks: claims to share in assets and net income
-No maturity date; periodic payments known as dividends
Capital Market: Intermediate + Long Term Debt + Equity
8. Financial Market Instruments
Money Market Instruments : Because of short term to maturity, debt instruments traded in the money
market do not have much fluctuation in their prices, and hence are the least risky
Capital Market Instruments: Debt and equity instruments with maturities greater than a year; these
have much greater fluctuations in their prices (compared to money market instruments) and as such are
considered more risky
9. Function of Financial Intermediaries
- Engage in process of indirect finance
- More important source of finance than securities markets
- Needed because of transactions costs and asymmetric information
Role of Financial Intermediaries: Transaction Costs, Risk Sharing, Asymmetric Information
10. Inflation rate = the percentage increase in the average level of prices.
Price = amount of money required to buy a good.
11. Velocity: Basic Concept: the rate at which money circulates.
Definition: the number of times the average dollar changes hands in a given time period.
V = velocity
T = value of all transactions
M = money supply
11. 1. Velocity, cont. : Use nominal GDP as a proxy for total transactions.
P = price of output (GDP deflator)
Y = quantity of output (real GDP)
P Y = value of output (nominal GDP)
Question: What is the difference between nominal GDP and total transactions?
Nominal GDP includes the value of purchases of final goods; total transactions also includes the value of
intermediate goods. Even though they are different, they are highly correlated. Also, our models focus
on GDP, and theres lots of great data on GDP. So from this point on, well use the income version of
velocity.
12. The quantity equation : M V = P Y
13. Money demand and the quantity equation: M/P = real money balances, the purchasing power of
the money supply.
-A simple money demand function: (M/P )
d
= k Y
k = how much money people wish to hold for each dollar of income. (k is exogenous)
14. Money demand and the quantity equation
Money demand: (M/P )
d
= k Y
Quantity equation: M V = P Y
The connection between them: k = 1/V
When people hold lots of money relative to their incomes (k is high), money changes hands
infrequently (V is low).
15. The quantity theory of money, cont. :
How the price level is determined:
-With V constant, the money supply determines nominal GDP (P Y ).
T
V
M

P Y
V
M

M V P Y
-Real GDP is determined by the economys supplies of K and the production function.
-The price level is : P = (nominal GDP)/(real GDP), i.e. PY/Y.
The quantity equation in growth rates:
The quantity theory of money assumes:
V is constant , so V/ V= 0
16. The inflation rate:

17. CREDIT = The word credit comes from the Latin "creditum-creditare", which means "to trust". This
points out a physiological factor of the credit activity which is the trust.
Loan / credit means immediate possession of resources in exchange of a future payment promised
involving also an interest payment, that rewards the lender.
18. The elements and features of credit:
a. The parties of the credit relation, the creditor and the debtor, are called in the literature "the
subjects of the credit relation". The creditors and the debtors can be grouped into three major
categories: the population, the state and the economic agents.
b. The promise of repayment represents the creditor's commitment to repay, at the maturity date, the
amount of the borrowed capital, plus the interest, as price of the credit.
c. The security/guarantee of the credits represents a characteristic related to their repayment.
Real guarantee - guaranteeing or "mortgaging" the credit with material valuables through the
valorization of which can be obtained the necessary amounts for repaying the credit - mortgage
Personal guarantee - the commitment taken by a third party to pay the amount become due in
case the debtor is not capable to pay it.
d. The maturity date or the repayment term provided in the contract differs according to the features
of the field of activity and the efficiency level of the credit beneficiaries' activity.
e. The interest represents a characteristic of the credit and it is the price of the used capital or the "rent"
that the debtor pays for the right conceded to him, that of using the borrowed capital. The
quantification of the interest is acquired by using the interest rate which becomes a tool for influencing
the demand and the supply of credits.
19. Interest rate main elements
The interest is a fee, paid on borrowed capital. The interest is calculated upon the value of the
assets.
The amount lent, or the value of the assets lent, is called the principal. This principal value is
held by the borrower on credit. Interest is therefore the price of credit, not the price of money
as it is commonly - and mistakenly - believed to be.
The percentage of the principal that is paid as a fee (the interest), over a certain period of time,
is called the interest rate.
The fee is also a compensation to the lender for foregoing other useful investments that could
have been made with the loaned money. These foregone investments are known as the
opportunity cost.
20. Simple interest rate: is normally used for a single period of less than a year
Is = p x i x n, Is - simple interest;
p - principal (original amount borrowed or loaned);
i - interest rate for one period;
n - number of periods.
21. Compound interest is calculated each period on the original principal and all interest accumulated
during past periods. Ic = p (1+ i)
n

If the compounding periods are yearly, semiannually, quarterly or continuous
Ic = p(1 + i/t)
nt

M V P Y
M V P Y


P
P

where: Ic = principal and interest rate; p = initial deposit; i = interest rate; t = number of times per
year interest is compounded; n = number of years invested.
22. Risks:
Systematic risks which includes the possibility that the borrower will be unable to pay on the
originally agreed terms, or that collateral backing the loan will prove to be less valuable than
estimated.
Regulatory risks which includes taxation and changes in the law which would prevent the lender
from collecting on a loan or having to pay more in taxes on the amount repaid than originally
estimated.
Inflation risks takes into account that the money repaid may not have as much buying power
from the perspective of the lender as the money originally lent, that is inflation, and may include
fluctuations in the value of the currencies involved.
23. Nominal real interest rate
Nominal interest rates include all three risk factors, plus the time value of the money itself.
Real interest rates include only the systematic and regulatory risks and are meant to measure
the time value of money.
Therefore the difference between the nominal interest rate and the real interest rate is given
by the inflation rate.
24. The real interest rate is the interest rate adjusted for expected changes in the price levels so that it
more accurately reflects the true cost of borrowing. So, the real interest rate includes compensation for
the lender's lost value due to inflation.
The real interest rate is defined by the Fisher equation which states that the nominal interest rate (i)
equals the real interest rate (r) plus the expected rate of inflation (): i = r +
Rearranging terms, the real interest rate equals the nominal interest rate minus the expected inflation
rate: r = i
25. The lender is anxious to make a loan in the case of increasing inflation rate, because in terms of real
goods and services, he will actually earn a lower interest rate.
On the other hand, the borrower fares quite well because at the end of the year, the amount
paid back will be less in terms of goods and services.
Therefore, when the real interest rate is low, there are greater incentives to borrow and less
to lend.
The distinction between real and nominal interest rates is important because the real interest
rate, which reflects the real cost of borrowing, is likely to be a better indicator of the incentives
to borrow and lend.
26. Fixed interest rate versus floating interest rate
The fixed interest is provided in the credit contract and it is valid for the entire period of the
credit.
The floating interest is modified periodically according to the inflationary pressures and the
evolution of the interest level on the market.
27.

Interbank interest rates
EURIBOR is short for Euro Interbank Offered Rate. The Euribor rates are based on the average
interest rates at which a large panel of European banks borrow funds from one another. There
are different maturities, ranging from one week to one year.
LIBOR is the average interbank interest rate at which a selection of banks on the London money
market are prepared to lend to one another.
ROBOR (Romanian Interbank Offered Rate) is the average interest rate for RON-denominated
loans in the interbank market and is set by the National Bank of Romania.
28. Types of credit
a. According to the economic nature and the parties of the crediting relation
Commercial credit The borrowing is done in the form of merchandise (the goods and services are paid
at a later date and not in the moment of the sale);
Banking credit is related to the amount of funds that an individual or a business may be able to borrow
from one or more lending institutions (Advances in current account or treasury credits , credit lines
in order to cover current needs);
Consumer credit - is a credit offered to natural persons/individuals who work based on a working
contract and have the salary as a main income source;
Bond credit - the selling of bonds by the state or companies to banks or other legal persons in order to
obtain additional capital, in exchange of an interest;
Mortgage credit - is made based on a building/fixed asset guaranty.
b. According to the debtor's position
Credit granted to natural persons this form of credit is granted to individuals;
Credit granted to legal persons This form of credit is granted to companies;
29. Loans granted to natural persons
Treasury credit - when the payments done through the current account are higher than the cash
existing in the account;
Consumption credit - for acquiring goods that will be paid by installments;
Personal credit - free utilization of the money received.
30. Personal loans, as a type of loans offered to individuals (natural persons) can have the following
forms:
-Fixed rate loans - generally used to provide financing for purchases for covering temporary gaps in
cash flows. They are made on short term (6 months-3 years) and can be secured or not; the payments
are generally done monthly.
-Budget accounts provide personal customers with the means of spreading their household and other
regular expenses through the year. The customer makes a regular monthly payment into a budget
account (one twelfth of the agreed estimated annual expenses) and draws on that account to settled
specified bills.
-Mortgage loans - loans secured by means of a legal charge over a property
-Bridging loans are short term loans that provide a customer with funds to purchase a new home while
the sale proceeds of their former home are awaited.
-Credit cards - provide a revolving credit facility, up to a predetermined maximum, and a period of
interest-free credit if the balance on the statement is paid off in full within a stated period.
31. Loans granted to legal persons
- Factoring - is a method of financing where a bank or other specialized company purchases a
company's trade receivables.
- Warehousing financing facilitates inventory lending by providing controls on the disposition of a
borrower's inventories.
-Leasing is a process by which a firm can obtain the use of a certain fixed assets for which it must pay a
series of contractual, periodic, tax deductible payments. The lessee is the receiver of the services or the
assets under the lease contract and the lessor is the owner of the assets.
-Inventory financing loan that is secured by inventory and is scheduled to be repaid from the sale of
that inventory.
32. According to the debtor's and the creditor's nature :
Private credit This type of credit is the one offered to companies and individuals in order to perform
their activity and achieve certain goals;
Public credit covers the public expenses of the state;
33. According to the purpose of granting the credit
Credits for production support the companies in their production process;
Credits for circulation covering the expenses with the transportation and storing of goods;
Credits for consumption - granted for the procurement of goods for personal use;
34. According to the nature of the guarantees
Real credits based on a material security (real guarantee);
Personal credits - based on personal moral guarantees (is the pledge of a third party to pay the credit if
the borrower cannot do it).
35. According to the extent of the creditor's rights
Credits that can be declared exigible before their maturity date;
Credits that cannot be declared exigible before their maturity date;
Mixed credits;
36. According to the way of paying off the obligations of payment
Redeemable credits. The redeemable credit is a credit which involves installments, equal or not, and can
be with or without interest.
Non-redeemable credits ("Balloon" credits). For these credits, the reimbursement of the loan is done
entirely at the maturity date.
37. Other types of credits
Overdrafts are agreed lines of credit or borrowing facilities that a personal or corporate customer may
use by drawing on a current account.
Project loans are loans made to finance major capital investment projects, for which the cash flow
arising from the project is either sole or the main source of the loan repayments.
Syndicated loans are loans provided jointly by a number of banks (when the size of the loan is one that
individual banks would be either unable or unwilling to provide alone).
Sovereign loans - banks lend substantial amounts to foreign governments and the public sectors in
overseas countries.
Soft loans - loans with preferential terms (can include interest rates lower than the market rate and long
terms - over 30 years).
Bridge loans - are short term project type loans that bridge a period of time up to a specific event that
generates sufficient funds for repayment of the loan
Revolving credit loans - loans that finance the expansion of current assets or the retirement of current
liabilities.
38. Definition of credit according to the Romanian Law
According to Law no. 58/1998, art. 3, the credit represents any payment engagement of an amount of
money in exchange of the right to repay the amount paid and to pay interest or any expenses related to
this amount or any prolongation of a debt's maturity as well as any engagement of acquiring a title that
includes a debt or any other right to pay an amount of money.