Homework Activity – Banking Concepts 1

This homework activity checks your understanding of the core principles in money and banking, the role of money, the valuation of financial instruments, and the effect of inflation on interest rates. Briefly answer (in a list or short paragraph) the following questions:

Identify the core principles that could be used to explain why credit card issuers charge such high rates of interest.

Refer to Chapter 1, section “The Five Core Principles of Money and Banking,” pages 4–8.
Explain why the following statement is true: “Money is an asset, but not all assets are money.” Refer to Chapter 2, section “Money and How We Use It,” pages 23–25.
Identify the four fundamental characteristics that determine the value of a financial instrument. Refer to Chapter 3, section “Primer for Valuing Financial Instruments,” pages 50–51.
If a borrower and a lender agree on a long-term loan at a nominal interest rate that is fixed over the duration of the loan, explain how a higher-than-expected rate of inflation will impact the parties, if at all. Refer to Chapter 6, section “Inflation Risk,” pages 151–152.