Week 14 · Chapter

Chapter 14 — Paying for Growth: Money, Banking & Financial Management

Introduction to Business Free sample edition

The module's primary reading · ~45–55 minutes · Objective 7 (read a balance sheet, an income statement, and a statement of cash flows and compute the basic ratios; explain money, banks, deposit insurance, and the Federal Reserve; and compare debt and equity financing and the securities markets for a growth decision), Objective 2 (explain how entrepreneurs turn an idea into a funded small business — a business-plan outline in the SBA's traditional format, an industry analysis with the five competitive forces, and a start-up funding plan — and compare the forms of business ownership, franchising, and mergers for that venture) · Read it first this week; the lecture, the slides, the tutorial, and the quiz all build on it.

In plain language

Growing a business takes money, and this week is about where that money comes from and who keeps it safe. You start with money itself (anything people widely accept in trade that also measures prices and holds value for later). Then you meet the banks and credit unions that hold it, the Federal Reserve (the central bank of the United States), and the government insurance that protects bank deposits. Last, you compare the two ways a business pays for growth: debt financing (borrowing and paying it back with interest) and equity financing (selling part of the ownership). You will lay out the coffee cart's choice for a second cart with every number shown and no verdict.

Why you already care about this

Think about the last time you wanted something that cost more than you had saved, such as a laptop, a used car, or a semester's books. You could wait and save, you could borrow from a bank or a family member, or you could split the cost with someone who would then share the use of it. Each path has a price. A loan charges interest. Sharing means you no longer own the whole thing.

The coffee cart is at that same fork, with larger numbers. A second cart costs 20,000 dollars. The cart's year-end balance sheet shows 10,000 dollars of cash, so half the price is missing. The owner has two offers on the table: borrow 20,000 dollars at 8 percent a year, or sell a 25 percent share of the business to an investor for 20,000 dollars. Before choosing, the owner needs to know what money is, where it is kept, what protects it, and what each kind of financing really costs.

By the end of this chapter you will be able to:

explain financial management and read the year's statements before a growth decision;
name money's three jobs and the traits that let money do them;
tell a commercial bank, a credit union, and a nondepository institution apart;
describe the Federal Reserve's structure, its two goals, and its tools in words;
state deposit insurance in the FDIC's own wording and say what it does not cover;
compare debt financing with equity financing on cost, repayment, and ownership;
tell stocks from bonds, and the primary market from the secondary market;
name the Securities Act of 1933, the Securities Exchange Act of 1934, and the Sarbanes-Oxley Act of 2002;
lay out a financing choice from the statements, with fact and judgment labelled.

Carry this line with you: a loan costs interest; a share costs part of every future profit.

Where we are

Already covered: Week 2 named monetary policy and the Federal Reserve; Week 3 built the cart's start-up funding plan; Week 4 compared the ownership forms and showed that a corporation can sell stock; Week 13 read the cart's first year in three financial statements and four ratios.
This week: money and its jobs, the financial institutions, the Federal Reserve, deposit insurance, debt versus equity financing, stocks versus bonds, the securities markets and the laws that protect investors, and the cart's financing choice.
How they connect: Week 13 told you what the cart owns, owes, and earned; this week uses those exact lines to weigh how a second cart could be paid for.
Where we're going next: Week 15, Growing Beyond Borders: Global Business & the Course Synthesis, takes the business past its home market and closes the course.

Several earlier numbers return this week. In Week 3 the cart needed 30,000 dollars to open, and the owner covered it with 20,000 dollars of the owner's own money and a 10,000-dollar equipment loan at 10 percent a year. In Week 4 you met stock, shares of ownership in a corporation, which the corporation can sell to raise money. In Week 13 the cart ended its first year with net income of 9,000 dollars, cash of 10,000 dollars, total liabilities of 12,000 dollars, and owner's equity of 16,000 dollars. Its debt-to-equity (total liabilities divided by owners' equity) was 12,000 ÷ 16,000 = 0.75. Every one of those numbers returns below.

1. Read the statements first: the growth question

Picture the owner at the end of year one, looking at a second cart for sale. It costs 20,000 dollars. A second cart could reach the office building two blocks away while the first cart works the farmers' market. The question is not whether the idea is good. The question is how to pay for it.

Financial management is the work of planning how a business raises money and how it uses that money.

A careful owner does this work in order: read the statements, find the gap, then compare the ways to fill it. You already have the statements from Week 13.

Worked example — finding the gap. The cart's figures are illustrative, constructed for this course and not real data; money is in dollars.

The second cart's price is 20,000 dollars.
The year-end balance sheet shows cash of 10,000 dollars.
The gap: 20,000 − 10,000 = 10,000 dollars of the price is more than the cart holds in cash.
Year one's net income was 9,000 dollars, and the owner withdrew 13,000 dollars over the year, so profit did not pile up as cash.

In words: even after a profitable year, the cart's cash covers only half of the second cart, so the rest has to come from a lender or an investor.

This is not the cart's first financing decision. The start-up funding plan already paired two kinds of money.

Worked example — how the first cart was funded. The figures are illustrative; money is in dollars.

Owner's money: 20,000 dollars, the owner's own stake in the business.
Equipment loan: 10,000 dollars, borrowed at 10 percent a year.
Total: 20,000 + 10,000 = 30,000 dollars, matching the start-up needs.

In words: the first cart was paid for partly with the owner's own money and partly with borrowed money, and the second cart's choice is the same choice again, at a larger size.

The business plan has a home for this. Its funding request section states how much money the business needs, what the money will pay for, and where the owner hopes it will come from. A second cart means a new funding request: 20,000 dollars, for one cart, from a lender or an investor.

Misconception check. Students often think a profitable year means the money for growth is already in the bank. That is tempting, because "earning money" and "having money" sound alike. But the cart earned 9,000 dollars of net income and still ended with 10,000 dollars of cash, after the owner's withdrawals and a loan payment. The cure is to read cash from the balance sheet, not from the income statement, before you plan a purchase.

2. Name money's three jobs

Picture an illustrative ride-share driver at the end of a week. Riders paid in dollars, not in groceries or favors. The driver compares fares to see which trips paid best. And the driver set some money aside for a car repair next month. Those three moments are money's three jobs.

Money is anything people widely accept in exchange for goods and services that also works as a yardstick for prices and a way to keep buying power for later. It does three jobs:

Medium of exchange — money's job as the thing buyers hand over and sellers accept in trade, so no one has to swap goods directly.
Unit of account — money's job as the yardstick that prices are stated in, so two prices can be compared. Some courses call it a standard or measure of value; the job is what you learn, not the label.
Store of value — money's job of keeping buying power over time, so income earned now can be spent later.

Worked example — the driver's week. The driver and the figures are illustrative.

Medium of exchange: riders pay their fares in dollars, and the driver accepts them.
Unit of account: an 18-dollar fare for a 9-mile trip paid 18 ÷ 9 = 2 dollars a mile.
Unit of account again: a 12-dollar fare for a 4-mile trip paid 12 ÷ 4 = 3 dollars a mile.
Store of value: the driver sets aside 150 dollars a week for 4 weeks, so 150 × 4 = 600 dollars is ready for the repair.

In words: the shorter trip paid more per mile, and the driver can see that only because both fares are stated in the same unit; the 600 dollars set aside is money doing its third job.

Money does those jobs well when it has five traits. It is scarce (no one can make more at will), durable (it survives being used), portable (easy to carry or move), divisible (it breaks into small amounts for small prices), and widely accepted (sellers take it). Think of an illustrative campus bookstore's card reader. A tap moves an exact amount, down to the cent, from a student's account to the store's. That payment is portable and divisible: the reader can charge any amount, to the cent, without anyone carrying cash.

Misconception check. Students often file saving for later under the medium of exchange, because both involve "using money." But the medium of exchange is about a trade happening now, and the store of value is about buying power kept for later. The driver's 600 dollars is not trading for anything yet. The cure is to ask, "is money changing hands right now, or waiting?"

Pause and try this. Choose one: (a) describe one moment from your own week when money did each of its three jobs; or (b) explain in two sentences why a currency that loses buying power quickly would do its store-of-value job badly.

3. Meet the institutions that hold and lend money

The illustrative campus bookstore ends each day with card sales that land in its account. Someone holds that money, keeps a record of it, and lends some of the deposits out to other people. That someone is a financial institution: an organization whose business is holding, lending, or moving money for people and businesses, such as a bank, a credit union, or an insurance company.

Three kinds matter for this course:

A commercial bank is a financial institution that accepts deposits and makes loans to people and businesses.
A credit union is a financial institution that accepts deposits and makes loans and is organized as a financial cooperative owned by its members.
A nondepository institution is a financial institution that does not accept deposits, such as an insurance company, a pension fund, or a brokerage firm.

Worked example — sorting three accounts. The scenarios are illustrative.

The bookstore keeps its daily card sales in a checking account at a commercial bank, which accepts that deposit and lends money to other customers.
A student keeps savings at a credit union, so the student is a member and one of the credit union's owners.
The coffee cart's insurance policy comes from an insurance company, which takes premiums but no deposits, so it is a nondepository institution.

In words: the bank and the credit union both take deposits and make loans; what differs is who owns them, while the insurance company handles money without taking deposits at all.

The cart's 10,000-dollar equipment loan, and the second cart's loan offer, come from a lender of this kind. The 8 percent rate in the case is that lender's offer.

Misconception check. Students often think every financial institution is a bank that takes deposits. That is tempting, because banks are the ones with branches on every corner. But an insurance company or a pension fund moves large sums of money without accepting a single deposit. The cure is to ask two questions: does it take deposits, and who owns it?

4. Place the Federal Reserve: structure, goals, and tools

Banks hold your money, but who stands behind the banks? In the United States, that is the Federal Reserve, the central bank of the United States. It is made up of the Board of Governors, the 12 regional Reserve Banks, and the Federal Open Market Committee, and it runs monetary policy toward maximum employment and stable prices.

The Federal Reserve Act is the 1913 law that established the Federal Reserve System as the central bank of the United States. The Act was signed in 1913. The system's three key parts are:

the Board of Governors, the seven-member body that heads the Federal Reserve System;
the Reserve Banks, the 12 regional banks that make up the system with the Board and the committee; and
the Federal Open Market Committee, the part of the Federal Reserve that directs open market operations.

Congress assigned the Federal Reserve two goals: maximum employment and stable prices. Week 2 met this as monetary policy. Fiscal policy, government spending and taxes, belongs to Congress and the President instead.

The Fed works toward its goals with a short list of tools. This course names them in words and never computes them:

Open market operations — the Federal Reserve's tool of buying and selling securities in the financial markets to carry out monetary policy.
The discount window — the Federal Reserve's lending to banks, at the Fed's own rate for those loans.
A reserve requirement — a rule setting the share of deposits a bank must hold in reserve.
Interest on reserve balances — the interest the Federal Reserve pays banks on the money they keep in their accounts at the Fed.

Worked example — which tools are active. The facts come from the Federal Reserve's own pages.

Four tools are named: open market operations, the discount window, reserve requirements, and interest on reserve balances.
Reserve requirement ratios have been zero percent since 2020.
A ratio of zero asks banks to hold nothing in reserve against their deposits.
So of the four named tools, the reserve requirement is the one that is no longer an active lever.

In words: the reserve requirement is still a named tool, but at zero percent since 2020 it is no longer an active lever, so the Fed works through the other three.

Misconception check. Students often think the Federal Reserve sets every interest rate in the economy, including the rate on the cart's loan. That is tempting, because news reports about the Fed are usually about rates. But the 8 percent on the second cart's loan offer is the lender's rate in this case, not a rate the Fed set. The Fed's tools act on banks and the financial markets; each lender sets the rate on its own loans. The cure is to ask who signed the loan.

5. Protect the deposits: FDIC deposit insurance

Imagine your bank failed tomorrow. Would the money in your checking account be gone? For most deposits, no, because of deposit insurance: government protection of bank deposits, which the FDIC provides up to 250,000 dollars per depositor, per insured bank, for each account ownership category.

The Federal Deposit Insurance Corporation is the federal agency, created by the Banking Act of 1933, that insures deposits at insured banks; it is usually called the FDIC.

Read the FDIC's wording slowly, because every phrase matters:

per depositor — the limit applies to each person or business that holds deposits;
per insured bank — deposits at two different insured banks are counted separately; and
for each account ownership category — an account ownership category is a way of holding a deposit that the FDIC insures separately, such as an account owned by one person; the 250,000-dollar maximum applies to each category, not to each account.

What the insurance covers matters as much as how much. It covers deposit accounts such as checking, savings, money market deposit accounts, and certificates of deposit. It does not cover stocks, bonds, mutual funds, annuities, life insurance, crypto assets, or safe deposit boxes and their contents, even when a bank sells or holds them.

Worked example — two deposit checks. The cart's cash placement and the second depositor are illustrative.

Suppose the cart's 10,000 dollars of year-end cash sits in one ownership category at one insured bank.
10,000 dollars is under the 250,000-dollar maximum, so all of it is within the insured limit.
Now take an illustrative depositor with 300,000 dollars in one ownership category at one insured bank.
300,000 − 250,000 = 50,000 dollars is above the maximum for that category at that bank.

In words: the cart's cash is well inside the limit, while the second depositor has 50,000 dollars that the standard maximum does not reach; this is general education about how the rule reads, not advice for anyone's own accounts, and the FDIC is the agency to ask.

Misconception check. Students often think deposit insurance covers anything bought at a bank, including stocks and mutual funds, or that the limit is 250,000 dollars "per account." Both are tempting, because the bank's lobby sells many products, and "per account" is shorter to say. But the FDIC covers deposits only, and its limit is per depositor, per insured bank, for each account ownership category. The cure is to say the FDIC's whole phrase every time.

Pause and try this. Choose one: (a) explain to a family member, in two sentences, why a mutual fund bought at a bank branch is not FDIC-insured; or (b) explain why two accounts in one ownership category at the same bank do not each get their own 250,000-dollar limit.

6. Compare debt and equity financing

Go back to the laptop you could not afford. Borrowing from a bank means you own the laptop, but you owe monthly payments with interest. Splitting the cost with a roommate means no payments, but the roommate shares the laptop for as long as it lasts. Businesses face the same two paths when they grow.

Debt financing is raising money by borrowing it, so the business must repay the principal with interest on a schedule whether or not it earns, while the owner keeps full ownership. The principal is the amount of money borrowed on a loan or a bond, which the borrower must pay back in addition to the interest.

Equity financing is raising money by selling a share of ownership, so there is no interest and no repayment schedule, but the new owner shares every future profit.

An ownership share is the percent of a business that one owner holds, out of 100 percent.

Worked example — the two offers for the second cart. The figures are illustrative; money is in dollars and shares in percent.

The loan: 20,000 dollars at 8 percent a year.
Its yearly interest: 20,000 × 0.08 = 1,600 dollars a year, owed whether or not the second cart earns.
The owner's share with the loan: 100 percent.
The investor's offer: 20,000 dollars for a 25 percent share.
The owner's share with the investor: 100 − 25 = 75 percent, and the investor holds 25 percent.
The investor option's interest: 0 dollars, with no repayment schedule.

In words: the loan keeps the owner at 100 percent but adds a fixed 1,600 dollars a year, while the share costs no interest but hands an investor a quarter of every future profit.

Notice that the start-up funding plan already used both. The owner's 20,000 dollars was equity, the owner's own stake. The 10,000-dollar equipment loan was debt, repaid with 10,000 × 0.10 = 1,000 dollars of interest in year one.

Misconception check. Students often treat debt as "free money" because it does not dilute ownership. That is tempting, because the owner still owns 100 percent. But the loan costs 1,600 dollars a year and must be repaid on schedule, even in a year when the second cart sells nothing. The cure is to price both offers: debt costs interest and a fixed schedule; equity costs a share of every future profit.

7. Tell stocks from bonds

Picture an illustrative bike-shop chain, organized as a corporation, that wants to open new stores. It can raise money the same two ways the cart can, but at a larger size and from many investors at once: it can sell stock, or it can sell bonds.

Recall from Week 4 that stock is shares of ownership in a corporation, which the corporation can sell to raise money. A person who buys stock becomes a stockholder, one of the corporation's owners.

A bond is a loan to the company or government that issues it, which promises the holder interest and the return of the principal. A bondholder is a person or organization that holds a bond and is therefore a creditor of the issuer, not one of its owners.

A dividend is a share of a corporation's profit paid out to its stockholders, which the board of directors decides whether to pay. The board of directors is the group elected by a corporation's stockholders to oversee the company and make decisions such as whether to pay a dividend. The board need not pay one; it may keep the profit and reinvest it.

Worked example — two investors in the bike-shop chain. The chain and its investors are illustrative, and the example uses no figures.

Investor A buys newly issued stock, so Investor A is an owner and may receive a dividend if the board declares one.
Investor B buys a newly issued bond, so Investor B is a creditor and is promised interest and the return of the principal.
If the board decides to keep this year's profit to open stores, Investor A receives no dividend, and the board has broken no promise.
Investor B's interest is still owed, because a bond is a loan.

In words: the stockholder owns a piece of the chain and shares in its profits only when the board pays them out, while the bondholder owns nothing but is owed interest either way.

This is also why the legal form matters. A corporation can sell stock to raise equity, while a sole proprietorship has one owner and no shares to sell. The cart's owner chose an LLC in Week 4 for its liability shield, and the investor's offer would make the owner one of two owners rather than the only one.

Misconception check. Students often think bondholders are owners, or that dividends are required. Both are tempting, because both stocks and bonds are "investments in the company." But a bond is a loan, so its holder is a creditor, and a dividend is a choice the board makes each time. The cure is to ask, "is this person an owner or a lender?" before asking what they are owed.

8. Follow the securities markets and the laws that protect investors

Stocks and bonds are both securities: tradable financial claims, such as stocks and bonds, that a company or government sells to investors to raise money. Securities change hands in two different markets, and only one of them sends money to the issuer.

The primary market is the market in which a company or government sells newly issued securities to investors and receives the money.
The secondary market is the market in which investors trade securities that already exist among themselves, with nothing going to the issuer.

Worked example — a bond's two lives. The transit agency and its investors are illustrative, and the example uses no figures.

An illustrative city transit agency sells new bonds to pay for buses. Investors pay the agency, so this sale is in the primary market.
A year later, one of those investors sells a bond to another investor. The money passes between the two investors, so this trade is in the secondary market.
The transit agency receives nothing from the second trade, but it still owes the bond's interest to whoever holds the bond.

In words: the agency raised its money once, in the primary market; every later trade moves the bond between investors without adding a dollar to the agency.

Investors buy securities from strangers, so federal law sets rules for what they must be told. Three statutes anchor that protection:

The Securities Act of 1933 is the federal law that requires investors to receive significant information about securities offered for public sale.
The Securities Exchange Act of 1934 is the federal law that created the Securities and Exchange Commission to oversee the securities markets. The Securities and Exchange Commission is the federal agency, created by the Securities Exchange Act of 1934, that oversees the securities markets and protects investors; it is usually called the SEC.
The Sarbanes-Oxley Act of 2002 is the federal law that aimed to strengthen corporate responsibility and financial disclosure and to combat corporate and accounting fraud.

Last comes risk and return: the pairing of an investment's expected earnings with how widely those earnings might swing, where higher expected returns come with wider swings. This course names that trade-off in words and never computes a return.

Caveat: none of this is a recommendation to buy or sell any security. It is general education about how the markets and the laws are set up.

Misconception check. Students often swap the 1933 and 1934 Acts. That is tempting, because they passed one year apart: 1934 − 1933 = 1 year. But only the 1934 Act created the SEC; the 1933 Act is about the information investors receive when securities are offered for sale. The cure is a memory hook: the agency came second, in 1934.

Pause and try this. Choose one: (a) explain in two sentences why a company receives no money when its existing stock is traded among investors; or (b) explain why a law requiring disclosure might make strangers more willing to buy a company's securities.

9. Lay out the financing choice: borrow or sell a share

Now the owner can put it all together. The tools from Week 13 turn the two offers into numbers a lender, an investor, or the owner can read. The goal is not to pick the winner for the owner. The goal is to show each trade-off plainly enough that the owner can make an informed decision.

Worked example — the two offers on the balance sheet. The figures are illustrative, constructed for this course and not real data; money is in dollars and shares in percent.

Debt-to-equity now: 12,000 ÷ 16,000 = 0.75.
With the loan, total liabilities rise: 12,000 + 20,000 = 32,000 dollars.
Debt-to-equity with the loan: 32,000 ÷ 16,000 = 2.0.
With the investor, owners' equity rises instead: 16,000 + 20,000 = 36,000 dollars.
Debt-to-equity with the investor: 12,000 ÷ 36,000 is about 0.33, rounded to two decimal places.
Year one for scale: net income was 9,000 dollars, and the first loan's interest was 1,000 dollars.
The new loan's interest would be 1,600 dollars a year, owed in a year like year one and in a year when the second cart earns nothing.

In words: borrowing lifts debt-to-equity from 0.75 to 2.0, so the cart would owe 2 dollars for each dollar of the owner's claim, and it adds 1,600 dollars a year of interest; selling a share drops debt-to-equity to about 0.33 and adds no interest, but the owner keeps 75 percent of every future profit instead of 100 percent.

Compare the two debt-to-equity results side by side: 2.0 versus 0.33 means the loan path leaves the cart owing about six times as much per dollar of equity as the share path does.

In practice (your tools). You can lay out both offers in any free spreadsheet, such as Google Sheets. Type 20000 in cell B2 for the second cart's price and 0.08 in cell B3 for the loan rate, then type =B2*B3 in cell B4 for the yearly interest. Type 12000 in cell B5 for total liabilities and 16000 in cell B6 for owner's equity. In cell B7 type =B5/B6 for debt-to-equity now, in cell B8 type =(B5+B2)/B6 for debt-to-equity with the loan, and in cell B9 type =B5/(B6+B2) for debt-to-equity with the investor. Format cell B9 to two decimal places.

Now separate fact from judgment, the way every recommendation in this course does:

Facts: the 1,600 dollars of interest, the 75 percent and 100 percent ownership shares, and the three debt-to-equity results are computed from the case's own numbers.
Judgments: whether 2.0 is too much debt for a two-cart business, or whether a quarter of every future profit is too high a price, depends on what the owner values and expects.

A careful write-up also says what would change the answer. A sales record that makes steady profits look likely might make the fixed interest feel safe. A worry about lean months, or a wish for a partner's help, might make the share look better. Honesty note: this case is general education, never investment, legal, or tax advice for anyone's own business; a real owner would talk with the lender, the investor, and the agencies that administer the rules.

Misconception check. Students often read the lower debt-to-equity as proof that selling a share is the better choice. That is tempting, because a lower ratio sounds safer. But the ratio is a fact, and "better" is a judgment: the share path costs the owner a quarter of every future profit for as long as the investor holds it. The cure is to state each option's cost in its own terms before you weigh them.

Pause and try this. Choose one: (a) write one sentence arguing for the loan and one arguing for the share, and label the fact and the judgment in each; or (b) name one new fact about the cart's second year that would change which option you would lean toward, and explain why.

Key terms

financial management — The work of planning how a business raises money and how it uses that money, such as deciding whether to borrow or sell a share of ownership to pay for growth. (first used: 1. Read the statements first: the growth question)
money — Anything people widely accept in exchange for goods and services that also works as a yardstick for prices and a way to keep buying power for later. (first used: 2. Name money's three jobs)
medium of exchange — Money's job as the thing buyers hand over and sellers accept in trade, so no one has to swap goods directly. (first used: 2. Name money's three jobs)
unit of account — Money's job as the yardstick that prices are stated in, so two prices can be compared; some courses call it a standard or measure of value. (first used: 2. Name money's three jobs)
store of value — Money's job of keeping buying power over time, so income earned now can be spent later. (first used: 2. Name money's three jobs)
financial institution — An organization whose business is holding, lending, or moving money for people and businesses, such as a bank, a credit union, or an insurance company. (first used: 3. Meet the institutions that hold and lend money)
commercial bank — A financial institution that accepts deposits and makes loans to people and businesses. (first used: 3. Meet the institutions that hold and lend money)
credit union — A financial institution that accepts deposits and makes loans and is organized as a financial cooperative owned by its members. (first used: 3. Meet the institutions that hold and lend money)
nondepository institution — A financial institution that does not accept deposits, such as an insurance company, a pension fund, or a brokerage firm. (first used: 3. Meet the institutions that hold and lend money)
Federal Reserve — The central bank of the United States, made up of the Board of Governors, the 12 regional Reserve Banks, and the Federal Open Market Committee, which runs monetary policy toward maximum employment and stable prices. (first used: 4. Place the Federal Reserve: structure, goals, and tools)
Federal Reserve Act — The 1913 law that established the Federal Reserve System as the central bank of the United States. (first used: 4. Place the Federal Reserve: structure, goals, and tools)
Board of Governors — The seven-member body that heads the Federal Reserve System. (first used: 4. Place the Federal Reserve: structure, goals, and tools)
Reserve Banks — The 12 regional banks that, with the Board of Governors and the Federal Open Market Committee, make up the Federal Reserve System. (first used: 4. Place the Federal Reserve: structure, goals, and tools)
Federal Open Market Committee — The part of the Federal Reserve that directs open market operations, one of the Fed's main policy tools. (first used: 4. Place the Federal Reserve: structure, goals, and tools)
open market operations — The Federal Reserve's tool of buying and selling securities in the financial markets to carry out monetary policy. (first used: 4. Place the Federal Reserve: structure, goals, and tools)
discount window — The Federal Reserve's lending to banks, at the Fed's own rate for those loans. (first used: 4. Place the Federal Reserve: structure, goals, and tools)
reserve requirement — A rule setting the share of deposits a bank must hold in reserve; the Federal Reserve has set the ratio at zero percent since 2020, so it is no longer an active lever. (first used: 4. Place the Federal Reserve: structure, goals, and tools)
interest on reserve balances — The interest the Federal Reserve pays banks on the money they keep in their accounts at the Fed, one of its policy tools. (first used: 4. Place the Federal Reserve: structure, goals, and tools)
deposit insurance — Government protection of bank deposits, which the FDIC provides up to 250,000 dollars per depositor, per insured bank, for each account ownership category. (first used: 5. Protect the deposits: FDIC deposit insurance)
Federal Deposit Insurance Corporation — The federal agency, created by the Banking Act of 1933, that insures deposits at insured banks; it is usually called the FDIC. (first used: 5. Protect the deposits: FDIC deposit insurance)
account ownership category — A way of holding a deposit that the FDIC insures separately, such as an account owned by one person; the 250,000-dollar maximum applies to each category, not to each account. (first used: 5. Protect the deposits: FDIC deposit insurance)
debt financing — Raising money by borrowing it, so the business must repay the principal with interest on a schedule whether or not it earns, while the owner keeps full ownership. (first used: 6. Compare debt and equity financing)
principal — The amount of money borrowed on a loan or a bond, which the borrower must pay back in addition to the interest. (first used: 6. Compare debt and equity financing)
equity financing — Raising money by selling a share of ownership, so there is no interest and no repayment schedule, but the new owner shares every future profit. (first used: 6. Compare debt and equity financing)
ownership share — The percent of a business that one owner holds, out of 100 percent. (first used: 6. Compare debt and equity financing)
bond — A loan to the company or government that issues it, which promises the holder interest and the return of the principal. (first used: 7. Tell stocks from bonds)
bondholder — A person or organization that holds a bond and is therefore a creditor of the issuer, not one of its owners. (first used: 7. Tell stocks from bonds)
dividend — A share of a corporation's profit paid out to its stockholders, which the board of directors decides whether to pay. (first used: 7. Tell stocks from bonds)
board of directors — The group elected by a corporation's stockholders to oversee the company and make decisions such as whether to pay a dividend. (first used: 7. Tell stocks from bonds)
securities — Tradable financial claims, such as stocks and bonds, that a company or government sells to investors to raise money. (first used: 8. Follow the securities markets and the laws that protect investors)
primary market — The market in which a company or government sells newly issued securities to investors and receives the money. (first used: 8. Follow the securities markets and the laws that protect investors)
secondary market — The market in which investors trade securities that already exist among themselves, with nothing going to the issuer. (first used: 8. Follow the securities markets and the laws that protect investors)
Securities Act of 1933 — The federal law that requires investors to receive significant information about securities offered for public sale. (first used: 8. Follow the securities markets and the laws that protect investors)
Securities Exchange Act of 1934 — The federal law that created the Securities and Exchange Commission to oversee the securities markets. (first used: 8. Follow the securities markets and the laws that protect investors)
Securities and Exchange Commission — The federal agency, created by the Securities Exchange Act of 1934, that oversees the securities markets and protects investors; it is usually called the SEC. (first used: 8. Follow the securities markets and the laws that protect investors)
Sarbanes-Oxley Act of 2002 — The federal law that aimed to strengthen corporate responsibility and financial disclosure and to combat corporate and accounting fraud. (first used: 8. Follow the securities markets and the laws that protect investors)
risk and return — The pairing of an investment's expected earnings with how widely those earnings might swing, where higher expected returns come with wider swings. (first used: 8. Follow the securities markets and the laws that protect investors)

Summary

Financial management plans how a business raises money and how it uses it.
The cart needs 20,000 dollars for a second cart but held 10,000 dollars of cash at year-end.
Money is a medium of exchange, a unit of account, and a store of value.
Commercial banks and credit unions take deposits and make loans; nondepository institutions do not take deposits.
The Federal Reserve Act of 1913 created the central bank, with its Board of Governors, 12 Reserve Banks, and Federal Open Market Committee.
The Fed's goals are maximum employment and stable prices; reserve requirements have been zero percent since 2020.
The FDIC insures 250,000 dollars per depositor, per insured bank, for each account ownership category.
Deposit insurance never covers stocks, bonds, mutual funds, annuities, life insurance, or crypto assets.
Debt financing costs interest and a repayment schedule; equity financing costs a share of every future profit.
A stockholder is an owner; a bondholder is a creditor; the board decides whether to pay a dividend.
The primary market sends money to the issuer; the secondary market moves securities between investors.
The Securities Act of 1933 requires disclosure; the 1934 Act created the SEC; Sarbanes-Oxley followed in 2002.
The loan costs 1,600 dollars a year and lifts debt-to-equity to 2.0; the share leaves the owner 75 percent.

Check your understanding

Work these before looking at the answers — they are ungraded, and the answers (with reasoning) are at the bottom of the page.

An illustrative food-truck owner does three things in one week: a customer pays 9 dollars for a burrito; the owner compares a 30-dollar, 25-pound bag of rice with a 14-dollar, 10-pound bag; and the owner sets aside 200 dollars a month for 6 months toward a new grill. Name the job money does in each, and find the price per pound of each bag and the grill fund's total.
An illustrative depositor holds 160,000 dollars in a savings account and 130,000 dollars in a certificate of deposit, both in the same account ownership category at the same insured bank, plus 25,000 dollars in a mutual fund bought through that bank. How much of the deposits is above the standard maximum, and what happens to the mutual fund?
An illustrative bakery has total liabilities of 20,000 dollars and owners' equity of 50,000 dollars. To build a second oven room it can borrow 50,000 dollars at 6 percent a year or sell a 20 percent share for 50,000 dollars. Find the loan's yearly interest, the owner's share under each option, and debt-to-equity now, with the loan, and with the share.
A classmate says, "I bought a water-bottle company's bond from another investor last week, so the company got my money, I'm now one of its owners, and it has to pay me a dividend." Find the three mistakes and correct each.

Answers (worked reasoning — read after attempting)

The 9-dollar burrito payment is money as a medium of exchange, because a trade is happening now. The rice comparison is money as a unit of account: 30 ÷ 25 = 1.2 dollars a pound for the large bag and 14 ÷ 10 = 1.4 dollars a pound for the small bag, so the large bag costs less per pound. The grill fund is money as a store of value: 200 × 6 = 1,200 dollars kept for later. The trap this item catches is filing the grill fund under the medium of exchange; no trade happens until the grill is bought.
Deposits in the same ownership category at the same bank are added together: 160,000 + 130,000 = 290,000 dollars. The standard maximum is 250,000 dollars per depositor, per insured bank, for each account ownership category, so 290,000 − 250,000 = 40,000 dollars is above it. The 25,000-dollar mutual fund is not a deposit, so deposit insurance does not cover it at all, even though it was bought through the bank. The trap is reading the limit as "per account," which would wrongly make both accounts look fully covered.
The loan's interest: 50,000 × 0.06 = 3,000 dollars a year. The owner keeps 100 percent with the loan and 100 − 20 = 80 percent with the share. Debt-to-equity now: 20,000 ÷ 50,000 = 0.4. With the loan: (20,000 + 50,000) ÷ 50,000 = 70,000 ÷ 50,000 = 1.4. With the share: 20,000 ÷ (50,000 + 50,000) = 20,000 ÷ 100,000 = 0.2. These are facts; which option fits the bakery is a judgment that depends on how steady its profits are and how much the owner values full ownership.
First, a bond bought from another investor is a secondary-market trade, so the money went to the other investor, not the company. Second, a bondholder is a creditor, not an owner. Third, dividends go to stockholders and only when the board decides to pay them; a bondholder is promised interest and the return of the principal instead. The trap this item catches is treating every security as ownership.

Next up in this module: the Readings & Resources page, the lecture tutorial, the practice set, and the quiz — and next week an opportunity-cost table and the comparative-advantage model carry the cart beyond its home market.

Built with The Course Maker · samples.thecoursemaker.com