THE ECONOMICS OF

MONEY, BANKING
AND FINANCE
Lecturer: TCH
Chu 302
Mai Linh, Ms.

Email: chumailinh.cs2@ftu.edu.vn

Lecture 1 1
 ASSIGNMENTS &
ASSESSMENTS
• ATTENDANCE

Attendance is compulsory in accordance with FTU regulations. Students

are strongly advised not to miss lecture hours since success is closely
related with attendance.

• ASSIGNMENTS & ASSESSMENTS

% Contribution Form of Size of the assessment Feedback method
Assessment Duration

10% of the final mark Attendance

30% of the final mark Examination 45-60 Minutes Correct answers

60% of the final mark Examination 60 Minutes Correct answers

Lecture 1 2
 REFERENCES
1. The Economics of Money, Banking, and Financial
Markets, Frederic S. Mishkin, 11th edition, 2016

2. Financial Economics, Zvi Bodie, 2nd edition, 2000

3. Money, Banking and Financial Markets, Stephen G.

Cecchetti and Kermit L. Schoenholtz, 5th edition, 2017

4. Corporate Finance, Jonathan Berk and Peter DeMarzo,

4th edition, 2017
Lecture 1 3
 SYLLABUS PLAN
Readings
 Lecture 1: Introduction to Finance Bodie, Chapters 1+2
 Lecture 2: Money and Payment System Mishkin, Chapter 1
Cecchetti, Chapter 1,2,3
 Lectures 3-4 Bodie, Chapter 2
Financial Markets
 Lectures 5-6 Mishkin, Chapter 2,8
Financial Institutions Cecchetti, Chapter 3

 Lectures 7-9: Bodie, Chapters 4,5,8,9

Time Value of Money Mishkin, Chapter 4
Ceccetti, Chapters 4,6

 Lecture 10: Structure of Interest Rate Cecetti, Chapter 7

 Lecture 11:
Introduction to Corporate Finance Bodie, Chapter 3
 Lectures 12-13: Berk, Chapters 1,2
Interpreting Financial Statements
Lecture 1 4
Introduction to
Finance
Lecture 1

Lecture 1 5
 Content
1. Defining Finance
2. Why study Finance?
3. Financial Decisions
4. The Financial System
5. Six Parts of the Financial System
6. Flows of Funds through the Financial System

Lecture 1 6
 Defining Finance

• Finance is the study of how people allocate

scare resource over the time.

• The costs and benefits of financial decisions are

(1) spread out over the time

(2) usually not known with certainty in advance by

either the decision makers or anybody else.

Lecture 1 7
 Why study Finance?

• Suppose you need to take out a personal

loan with a bank.

• Could you be affected by the problems in

the interbank lending market such as
those seen during the 2007–2009
financial crisis?

Lecture 1 8
 Why study Finance?

• To manage your personal resources

• To deal with the world of business

• To pursue interesting and rewarding career

opportunities

• To make informed public choices as a citizen

• To expand your mind

Lecture 1 9
 Financial Decisions

1. Financial decisions of households

2. Financial decision of firms
3. Financial decision of government

Lecture 1 10
 Financial decisions of households

Households face 4 basic types of financial decision:

• 1. Consumption and saving decisions

• 2. Investment decisions

• 3. Financing decisions (if they borrow, they incur a

liability = debt,

• Their wealth or net worth = assets – liabilities)

• 4. Risk-management decisions

Lecture 1 11
 Financial decision of firms

The branch of finance dealing with financial decisions of

firms is called business finance or corporate finance.

• Capital budgeting process such as whether to build a

plant or produce a new product.

• Capital structure decision such as how much debt and

how much equity it should have in its capital structure.

• Working capital management, such as whether it should

extend credit to customer or demand cash on delivery.

Lecture 1 12
 Financial decision of government

• A government budget is a government document presenting the

government's proposed revenues and spending for a financial year that is
often passed by the legislature (parliament", "congress", and "assembly“)- -
Government budgets are of three types:

• Balanced Budget: when government revenue and expenditure are equal.

• Surplus Budget: when anticipated revenues exceed expenditure.

• Deficit Budget: when anticipated expenditure is greater than revenues.

Lecture 1 13
 Vietnam's budget balance
Vietnam's budget balance in relation to GDP 2024
2014 2015 2016 2017 2018* 2019* 2020* 2021* 2022* 2023* 2024*
0.

-1.

-2.
Budget balance in relation to GDP

-3.

-3.46
-3.55
-4. -3.72
-3.86
-3.97

-4.35 -4.27
-4.39

-5. -4.72

-6.

-6.29
-6.44

-7.
Data: Vietnam, Statista 2020

Lecture 1 14
 Government expenditure
Ratio of government expenditure to gross domestic product (GDP) in
31. Vietnam 2024*
30.2
Ratio of government expenditure to (GDP)

30.

29.2

29. 28.8
28.5

28. 27.8 27.8

27.6

27.1
27. 26.9
26.8
26.6

26.

25.

24.
2014 2015 2016 2017 2018* 2019* 2020* 2021* 2022* 2023* 2024*
Data: Vietnam, Statista 2020

Lecture 1 15
 National debt
National debt from 2014 to 2024 in relation to gross domestic
product GDP
70.

59.7
60. 58.2
57.1
54.7 55.6
54.4 53.3 52.5 51.6 50.5
49.4
National debt in relation to GDP

50.

40.

30.

20.

10.

0.
2014 2015 2016 2017 2018* 2019* 2020* 2021* 2022* 2023* 2024*

Data: Vietnam, Statista 2020

Lecture 1 16
 Inflationsrate
Inflationsrate in Vietnam from 1984 to 2024*
500.
453.54

400. 374.35
360.36
Inflation rate in percentage

300.

200.

91.6 95.77
100. 81.82
64.9
36.03 37.71
16.93 23.12 18.67
8.389.49 5.59 3.1 8.114.11 8.397.58.35 6.729.21 9.1 6.6 4.09 2.673.523.543.63.753.8 3.9 4
0 -0.314.083.3 7.89
-1.77 0.63 4
0.

-100.

2019*
2020*
2021*
2022*
2023*
2024*
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Data: Vietnam, Statista 2020

Lecture 1 17
 Financial System
• Financial system is defined as the set of markets
and other institutions used for financial
contracting and exchange of assets and risks.

• The financial system includes markets, stocks,

bonds and other financial instruments, financial
intermediaries and the regulatory bodies that
govern all of these institutions.

Lecture 1 18
 Six Parts of the Financial System

1.Money
2.Financial Instruments
3.Financial Markets
4.Financial Institutions
5.Regulatory Agencies
6.Central Bank

Lecture 1 19
 Money

• Money is the medium of exchange and to

store value

• Money is at the heart of the payments

system.
……………………………………………………………….

• What is the difference between wealth and income?

• What about liquidity?

Lecture 1 20
 Financial Instruments
• The written legal obligation of one party to
transfer something of value, usually money, to
another party at some future date, under certain
conditions.

Lecture 1 21
 Financial Instruments

1. Financial instruments act as a means of payment (like money).

Employees take stock options as payment for working.
2. Financial instruments act as stores of value (like money).
Financial instruments generate increases in wealth that are larger than
from holding money.

Financial instruments can be used to transfer purchasing power into

the future.
3. Financial instruments allow for the transfer of risk (unlike money).
Examples: Insurance contracts, future contracts.

Lecture 1 22
 Examples of financial
instruments
• The basic types of financial assets are debt, equity and derivatives.

• Debt instruments are issued by anyone who borrows money: corporate

bonds, government bonds, residential and commercial mortgages and
consumer loans.

• Derivative instrument are those where their value and payoffs are
“derived” from the behaviors of the underlying.

• Underlying instruments are used by saver/lenders to transfer resources

directly to investors/borrowers.

Lecture 1 23
 Features of Financial Instruments

• These contracts are very complex.

This complexity is costly, and people do not want
to bear these costs.
• Standardization of financial instruments
overcomes potential costs of complexity.
Most mortgages feature a standard application
with standardized terms.

•
Lecture 1 24
 Features of Financial Instruments

• Financial instruments also communicate

information, summarizing certain details about the
issuer.

• Financial instruments are designed to handle the

problem of asymmetric information.

Lecture 1 25
 Financial Markets

Financial markets are places where financial instruments are bought and sold.
• These markets are the economy’s central nervous system.
• These markets enable both firms an individuals to find financing for their
activities.
• These markets promote economic efficiency.
They ensure resources are available to those who put them to their best use.
They keep transactions costs low.

Lecture 1 26
Stock Market Indexes

Lecture 1 27
 Financial Institutions
• Firms that provide access to the financial
markets, both to savers who wish to purchase
financial instruments directly and to borrowers
who want to issue them.
• Also known as financial intermediaries.
▫ Examples: commercial banks, investment
banks, insurance companies,
securities firms, and pension funds.
Lecture 1 28
 Government regulatory agencies

• Government regulatory agencies provide

wide-ranging financial regulation – rules
and supervision.
Increasing Information Available to Investors

Ensuring the Soundness of Financial Intermediaries (Restrictions on

Entry, Disclosure, Restrictions on Assets and Activities, Deposit
Insurance, Limits on Competition, Restrictions on Interest Rates)

Lecture 1 29
Government regulatory agencies

Lecture 1 30
 Central banks
• Central banks began as large private banks to
finance wars.
• Central banks control the availability of
money and credit to ensure low inflation,
high growth and stability of financial
system

Lecture 1 31
Flow of Funds Through the
Financial System

Lecture 1 32
Flow of Funds Through the
Financial System

Lecture 1 33
 GDP contribution of finance, banking and insurance
in Vietnam 2015-2018

GDP contribution of finance, banking and insurance

in Vietnam 2015-2018
6.
5.49 5.52 5.47
5.33

5.

4.
GDP share

3.

2.

1.

0.
2015 2016 2017 2018*
Data: Vietnam; General Statistics Office of Vietnam; 2015 to 2018; figures at current prices, Statista 2020
Lecture 1 34
 GDP value of financial, banking and
insurance

GDP value of financial, banking and insurance

in Vietnam 2015-2018
350.

295.44
300.
273.81
GDP Value in trillion VND

248.6
250. 230.15

200.

150.

100.

50.

0.
2015 2016 2017 2018*
Data: General Statistics Office of Vietnam, Statista 2020

Lecture 1 35
 Summary
A healthy and constantly evolving financial system is the foundation for
economic efficiency and economic growth. It has six parts:
a. Money is used to pay for purchases and to store wealth.
b. Financial instruments are used to transfer resources and risk.
c. Financial markets allow people to buy and sell financial instruments.
d. Financial institutions provide access to the financial markets, collect
information,
and provide a variety of other services.
e. Government regulatory agencies aim to make the financial system
operate safely
and reliably.
f. Central banks stabilize the economy.

Lecture 1 36
 Fact

Lecture 1 37
 Group Discussion
1. What is your net worth? What have you included among your assets and
your liabilities?

2. You are thinking of starting your own business, but have not money.

a. Think of a business that you could start without having to borrow any
money.

b. Now think of a business that you would want to start if you could borrow
any amount of money at the going market interest rate.

c. What are the risks you would face in this business?

d. Where can you get financing for your new business?

Lecture 1 38
 Try it #: Net worth
• Joe and Mike purchase identical houses for $200,000. Joe makes a down
payment of $40,000, while Mike puts down only $10,000; for each individual,
the down payment is the total of his net worth. Assuming everything else is
equal, who is more highly leveraged? If house prices in the neighborhood
immediately fall by 10 percent (before any mortgage payments are made),
what would happen to Joe’s and Mike’s net worth?

Lecture 1 39