Gemini Solutions

AMC L0 | Session 1
Money, Why it exists?
Role of Central banks to control money flow
 Money

Money is any item or verifiable record, accepted as payment for goods and services and
repayment of debts in a country or socio-economic context

The main functions of money are distinguished as:

A medium of exchange A standard of deferred payment

A store of value A unit of account

Any item or verifiable record that fulfils these functions can be considered as money
https://www.youtube.com/watch?v=82OsCSdOno8
(10 min)
 Why Money exists?

• Money makes trade with people we might not know or trust possible, and trade makes a
society prosperous
• Trust is now placed in the value of money, rather than in every person we might want to buy
from or sell to

https://www.youtube.com/watch?v=lVNhbGsWWlE
(5 min)

(5 min)
https://www.youtube.com/watch?v=ZLwsNqPupZ8
 How Does Money Work?

Decision Decision
Makers Makers

https://www.youtube.com/watch?v=de3iGMjA_8c
(5 min)
 AMCs in Money flow
• An asset management company (AMC) invests pooled funds from clients into a variety of
securities and assets.
 Fiscal & Monetary Policy

Ministry of Finance of the country Central Bank of the country

Meaning

It helps control the spending and revenue It is a tool for the Central bank through
collections of the Government to influence which the movement and the flow of
the economy at large money in the economy is controlled

Focus

To ensure development and growth of an To maintain the economic stability of a

economy country
 Fiscal & Monetary Policy - Tools
Two ways, Government helps economy stay on track,

• Fiscal Policy
• Monetary Policy

Whenever
Government
Spending increases
more than
income(Tax), we
experience a fiscal
deficit.
 Monetary Policy - Types

Expansionary Monitory Policy Contractionary Monitory Policy

• An expansionary monetary policy is focused on • A contractionary monetary policy is focused on

expanding (increasing) the money supply in an contracting (decreasing) the money supply in an
economy economy.

• Implemented by lowering key interest rates • Implemented by increasing key interest rates
• Decrease rates like Repo, Reverse Repo • Increase rates like Repo, Reverse Repo
• Buy government securities – providing • Sell government securities – taking out
liquidity in the market liquidity from the market

• COVID – 19 Pandemic: • Taming inflation(US) of late 1970s:

• In 2020, when the Coronvirus swept the world • From 1972 to 1973, inflation jumped from 3.4%
and most countries went into lockdown, to 8.7%.
economies were hit hard by the lack of • There were many reasons for this dramatic
economic activity. To bolster the economy, the price rise, such as wage control and untying the
Fed implemented a quantitative easing US dollar from the gold standard
program. • To combat it, the Federal Reserve increased the
• On March 15, 2020, the Fed announced that it fed funds rate from 6% in January to 11% in
would purchase $500 billion in Treasury August. This reduced inflation to around 5.7%
securities and $200 billion in agency MBSs to
stimulate the economy
 Fiscal Policy - Types

Expansionary Fiscal Policy Contractionary Fiscal Policy

• An expansionary fiscal policy is focused on • A contractionary fiscal policy is focused on

stimulating consumer demand by increasing the decreasing the money supply in an economy.
money supply in an economy.

• Implemented by, • Implemented by,

• Tax cuts, • Increasing tax rates,
• Increased government spending • Reduced government spending

• 2007 meltdown in the U.S. mortgage market: • World War II:

• The crisis hurt economies around the globe, • The 1940s during World War Two - anytime a
with financial sector difficulties and flagging nation is at war, spending goes way up. To
confidence hitting private consumption, combat this, the government attempted to
investment, and international trade (all of issue bonds, but the most considerable relief
which affect output, GDP). came when the war ended and the government
• Governments responded by trying to boost demilitarized and cut spending in numerous
activity through two channels: new sectors
discretionary spending or tax cuts
 Gross Domestic Product(GDP)
GDP measures the monetary value of final goods and services—that is, those that are bought
by the final user—produced in a country in a given period of time (say a quarter or a year). It
counts all of the output generated within the borders of a country
 Fiscal & Monetary Policy – Reducing Inflation

• Inflation is the rate of increase in prices over a given period of time. Inflation is typically a broad measure, such as
the overall increase in prices or the increase in the cost of living in a country.
• The goal of both monetary and fiscal policy is creation of an economic environment where growth is stable and
positive and inflation is stable and low.

Reducing Inflation

To reduce inflationary pressures, the government or monetary authorities will try to reduce the growth of AD(demand)
• If we use fiscal policy, it will involve higher taxes, lower spending
• Higher interest rates increase the cost of borrowing and tend to slow down economic activity
 Role of Central banks to control money flow

https://www.youtube.com/watch?v=2CStPH8Hq_M
(4 min)

Trivia:
Why can’t governments print an unlimited amount of money?
https://www.youtube.com/watch?v=GFTKKyYSCKs
(5 min)
Compound Interest, Time Value of Money,
Net Present Value
“Compound Interest is the 8th wonder of the
world. He, who understands it, earns it; he, who
doesn’t, pays it!”
~ Albert Einstein
 A Tale of two Investors
Compounding Magic

Let’s take two 19-year-old friends, Will and Mike. They each decide to invest INR500 a
month.

• Will is resourceful and starts • Mike is slower off the mark.

investing at 19. • He doesn’t start investing his
• However, he only saves for eight years, INR500 a month until he’s 27.
then stops. • Unlike Will, he’s consistent and
• He manages to put INR48,000 in his disciplined.
account then leaves it alone. • He invests every single month
• His money starts compounding. until he’s 65.
• After eight years, his investment is • He manages to invest INR234,000
worth INR72,277.88 – assuming it in those 39 years – and of course,
compounds at 10% a year. every penny compounds at our
• Will's account then lies dormant, not example rate of 10% a year.
being added to for 39 years until he
turns 65.
• The compounding continues…
 A Tale of two Investors
Compounding Magic

At 65, whose account is worth more?

Will's, who started at 19 but only saved for eight

years?
Or

Mike's, who started at 27, and saved for 39 years?

When Will and Mike meet up for a reunion at 65, Will has INR2,973,857.31 in his account – Mike has INR2,537,257.67.
• Despite investing for 31 years longer than Will, because Mike lost out on those first 8 years of growth, he’s the
loser with INR436,599 less in his account.
• By starting earlier, the compound interest Will earns on his investment adds more value to his account than he
probably could have added on his own.

But what if Will hadn’t stopped investing at 27, and had carried on adding INR500 a month until he was 65 too?
• He’d walk away with INR5,511,115.02 at 65
 Time Value of Money
Time is Money

• The time value of money (TVM) is the concept that money you have now is worth more than
the identical sum in the future due to its potential earning capacity.
• This core principle of finance holds that provided money can earn interest, any amount of
money is worth more the sooner it is received.

• Imagine you could earn 10% annual interest at your bank.

And imagine a friend owed you money. They offered to pay
you back INR1,000 today, or INR1,050 a year from today.
Since you could have INR1,100 next year if you put that
INR1,000 in the bank today, you should take the immediate
repayment. The time value of INR1,050 in a year is less than
INR1,000 today.
 Test Your Understanding
QUESTION

If I offer you $100 and give you two options, either you can take the money today or you
can take the same money a year later. Which option would you chose?

A) Today itself

B) A year later
OPTIONS

It’s because if you have money today, you have an opportunity to invest it and earn
further interest on it, which would be lost if you take the money a year later.
 Net Present Value (NPV)
The Future depends on what you do Today

• Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash
outflows over a period of time
• NPV is used in capital budgeting and investment planning to analyze the profitability of a projected investment or
project
Example:
• A friend needs INR500 now, and will pay you back INR570 in a year. Is that a good investment when you can get
10% elsewhere?

• Money Out: INR500 now

You invested INR500 now, so PV = -INR500.00
• Money In: INR570 next year
PV = INR570 / (1+0.10)1 = INR570 / 1.10 = INR518.18 (to nearest cent)

• The Net Amount is:

Net Present Value = INR518.18 - INR500.00 = INR18.18

So, at 10% interest, that investment is worth INR18.18

(In other words it is INR18.18 better than a 10% investment, in today's money.)
Thank You!
WE DO COMMON THINGS
UNCOMMONLY WELL