English for finance and banking (topic)

Author: Paris_french

Topic 8: Relation between money and price level

The relation between money and price level is extremely significant in a market economy.

When the amount of money supplied increases, it means that there are a lot of demands, the price level increases too. And in contrast, if the money supply decreases, the price level decreases. Take an example of the case that 20 loaves of bread are produced each day. Each bread sold for $1. If consumers have $1 to buy bread, they will have one bread. However, if consumers have more than $1 to buy bread, they are willing to buy it. At the moment, the money supply rises. If producers only sold 20 loaves of bread a day, they must rise the price level of bread. Thus, in a market economy, the relation between money supply and price level is .... increasing money supplyà inceasing price level, decreasing money supply à decreasing price level.

*) Causes of inflation

- When the price level increases, inflation results. If money supply increases , people become willing and able to pay higher prices for the goods & services they want. Thus, demand increases. It pulls the price level increases too. Therefore, inflation results from rising money supply. This means that the money supply of consumers (demand of consumers) is pulling prices of goods and services to higher and higher levels è Demand-pull: rising demand.

- Cost-push: Increasing costs. When the owners of stores have to pay more for the goods they sell, they will raise their prices. And the prices of other costs rise too much as raw materials, taxes, etc. As workers see that they have to pay more for the things they want in day life, they will ask to increase wage. The reason is to make up for increased living costs. But it's not the end. If workers win wage increases, businesses will often raise their prices with still higher prices to pay, workers again ask for higher wages. The repetition makes an inflationary spiral. In an inflationary spiral, cost push up prices.

Topic 9: Who are the beneficiaries and victims of inflation? Why?

a) The beneficiaires of inflation:

- People who owe money: Those who borrow money before the start of an inflation may benefit from it. They have to repay their loans in the period of inflation, their loans are worth less than when they borrowed these loans. Ex: In 2000, the dollar had more than twice the purchasing power of the 2010 dollar. If someone who borrowed $5,000 in 2000 would have been able to repay the loan in 2010 with dollars that were worth only $2,500. This means that in 2000, with $5,000 people can buy a house but in 2010, the same house costs $10,000. In inflation, the value of money is diminished.

- People who own real estate: People who own homes or other properties find that their value has increased during a time of inflation. For example, a home purchased for 20,000,000VND in 1996 might sell for 350,000,000VND in 2010. In inflation, money is diminished, with a large amount of money, we can only buy a few things while house and other properties are not diminished, in constract, to buy a house, it's necessary to have a big amount money. As, people who own real estate are benefited in period of inflation.

b) Victims of inflation

- Retired people: Because retired people usually live on incomes from private pensions, bonds and social security. Their incomes are fixed while prices more and more increase. During inflation, the elderly are often forced to spend less with a fixed income before inflation, they can spend enough for living but during inflation the prices all goods and services increase. Thus, with the same amount of money, they will buy less than before. To limit consequences of inflation to retired people, social security income keeps up with inflation.

- People with savings: Because of inflation, money which people put into savings accounts is worth less after a period of years than when deposited it. This means that with an amount of money we can buy more much goods in year when they saved than after a period of years. For example, my parents had 10,000,000VND, they decided to deposit it in a savings account in 2000. Although, the interest on their saving was 12% per annum, their money has less value now than. Now they have 22,000,000VND. In 2000, gold cost 5,000,000VND/tael, 10,000,000VND=2 tael. In 2010, 36,500,000VND/tael, 22,000,000 =0.6 tael.

- People with low income: In general, people who earn low wages are forced to spend all things in life. In inflation, theyhave little enough to spend for living. They have to be forced to make do with fewer necessities as food, clothing and housing cost more.

Topic 10: Why do people save and invest? What are different kinds of credit?

a) Why people save and invest?

- People save for a rainy day: they save to provide for the unexpected. We can not konw what things will happen. Thus, we can set aside funds to prepare us to deal with bad luck if it does occur. Ex: When you are sick, if you have a saving account, you can take up it to spend on medicament.

- People save to buy costly things: there are many things that we want to own are expensive, even extremely expensive. One way that we can realize our dream for these things is to save money year by year until we have enough to afford them. Ex: if you want to buy a car, you must save many year.

- People save for additional income: when you bring money to invest out into the market, you can earn money. People who have an extra money often put it into saving accounts, bonds and stocks to earn the interests and dividents. Thus, their money gives birth to money and after day by day, their money is more and more.

- People save for retirement:  when we are old, we can't work for earning money. The best way for people to retire comfortably is to put money regularly into a fund that they will be able to draw upon later. To do this, as you are young, you should set aside money to save and thus, when you are retired, you will draw your deposit/ saving account to spend.

b) Different kinds of credit:

- Credit is a term in finance, used to denote transactions involving the transfer of money or  other property on promise of repayment, usually at a fixed future date.

- Kinds of credit: 1/ Mercantile or commercial credit: which merchants extend to one another to finance production and distribution of goods. 2/ Investment credit. 3/ bank credit. 4/consumer or personal credit. 5/ real-estate credit. 6/ public or government. 7/ international credit.

Topic 11: Why do people buy corporate stocks? What are different kinds of corporate stocks?

a) Why do people buy corporate stocks?

- year income (dividends): may people buy stocks primarily to receive income or dividends. Dividends are the portion of a corporate's earnings which are distributed to its stockholders. The size of a corporation's dividends de pends primarily on the success in earning profits.

- Investment: people who buy stocks always hope that their shares of stock increase in value over the long term to receive dividends because the value of a share of stock is not fixed from one day to the next. There are many reasons which make a compare and its stock more valuable. Thus, these reasons cause the price of its stocks to rise. It helps owners of the stock gain profit.

- Speculation: we have seen that the price of a stock may fluctuate from day to day. We don't know when the price of a stock increases or decreases. When we can not predict future events. Certainly, there are some one who feels they can make some pretty good guesses. Thus, they buy & sell stocks in the hope of earning a profit in a brief period of time. When they are correct in their predictions, they profit. When they are wrong, they lose.

- Bulls and bears: People who buy or sell stocks for speculation are called speculators. They hope to profit by correctly predicting whether a stock will rise or fall in value. Those who predict a rise in the price of a stock are known as bulls. To be bullish on st is to be optimistic about its future. Speculators who expect the price of a stock to fall are called bears. To be "bearish" is to be pessimistic about the future.

b) Kinds of corporate stocks

- Common stocks: stocks with the last claim to the residual equity in a corporation. Holders of these stocks have the last claim on the earnings and assets of a company and they may receive dividends only at the discretion of the company's board of directors and after all other claims on profits have been satisfied. Dividends and equity conferred by common stocks have no fixed value.

- Preferred stocks or preference shares.

- Redeemable stock and convertible stock.

Topic 12: What are advantages of mutual funds over individual investors of corporate securities?

*) A mutual fund is a company that invests on behalf of its shareholders. People purchase shares of the mutual funds, and the company pools the money of all these people. The company invests the pooled money in a variety of securities, including stocks, corparate bonds and government bonds. Income earned by the fund is distributed to the shareholders in accordance with the number of shares they own.

*) The advantages of mutual funds include:

1.Professional management. The employees of a mutual fund are trained to study financial information, economic trends and political developments. Few investors have the time or expertise to do this.

2. Diversification: To reduce the risks of ownership, mutual funds invest in a wide variety of stocks and bonds.

3. Liquidity: A mutual fund investment can be turned into cash quickly and easily.

  However, mutual funds are not risk-free. Generally, funds that invest in government securities carry less risk than the ones that invest in corporate stocks. In addition, many different companies sell mutual funds. Some of these companies are better managed than others. So even when investing in mutual funds, investigate before you invest.

Topic 13: What are purposes of taxes? How are taxes collected?

a) Purposes of taxes

A tax is a payment to government that is required by the law.

-purpose of taxes: + People have to pay taxes such as income taxes, excise taxes, sales taxes, payroll taxes, property taxes,etc for government. + /government have money for spending on education, defense, medicine and other public services. + curb inflation (ex: excise taxes). + Limit export goods and protect domestic goods. + Government pay for social insurance programmes, pensions and unemployment insurance. è taxes are major sources of government income

b) How are taxes collected?

*) Indirect taxes: (V.A.T, turnover tax (taxes on retail prices and prices charge by manufacturers and wholesalers). An indirect tax is one that can be passed on or shifted, to some one other than person making payment to the government. In the case of the property tax, landlords pass its costs to tenants in the form of higher rents. A tariff is another example of an indirect tax. Although the tariff is paid by the seller to the federal government, this tax can be-and is-passes on to consumers in the form of higher prices.

*) Direct taxes:  (income taxes, inheritance taxes, estate taxes) Unlike indirect taxes, a direct tax is paid by taxpayers who can not pass the cost to others. The income tax, the sale tax, the inheritance taxes and estate taxes are examples of direct taxes. Those who pay a direct tax know exactly when and how much they are being taxed.

Topic 14: What effects does a tax have on tax payers?

*) Progressive taxes: A tax that takes a larger percentage of a person's total income as that income increases is a progressive tax (Income taxes are charged as a percentage of an individual's earnings. But not everything that a taxpayer earns is subject to this tax.)

Ex: Taxable income           $ 5,000     10,000      20,000

       Tax rate (percent)            6              10              15

       Tax owed                     $299           1,308     3,054

*) Regressive tax: A tax that takes a larger proportion from a taxpayer with a low income than from a taxpayer with a high income is a regressive tax. Ex: ranging from $5,000 to $100,000 per annum had to pay the same amount of $1,000 tax.

*) Proportional taxes: also called flat-tax. A tax that requires all persons to pay the same percentage of their total income in taxes is a proportional tax.

Ex: Taxable income     $5,000      10,000          20,000

     Tax rate (percent)  10                10                  10

     Tax owed                  $500           1,000           2,000