Financial institutions pay interest when you deposit your money into one of their accounts.
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2 KEY CONCEPTS Financial institutions pay interest when you deposit your money into one of their accounts. Often, financial institutions charge fees or service charges for providing you with certain services or transactions A service charge is a fee charged by a financial institution for providing services A transaction is any activity that occurs within an account. EXAMPLE: Paying a bill Withdrawing cash from a bank machine
3 EXAMPLE 1 Interest Earned on Accounts Jhevon received $1000 from family members for his birthday. He plans to buy a car in the near future and he is putting all of the birthday money toward the purchase. On April 1, he opened a savings account and deposited the $1000. The account pays an annual interest rate of 3.65%, compounded daily / 100 = (a) How much will Jhevon s deposit be worth in 30 days? How much interest was earned? Need to express in terms of years 30 / 365 = P = Method 1: Using the compound interest formula n A P( 1 i) A 1000( ) 30 A 1000(1.0001) A 1000(1.003) A $ Jhevon s deposit will be worth $ in 30 days. Represents daily i = r / N compounding = / 365 (365x per year) = n = yn = ( )(365) = 30
4 EXAMPLE 1 Interest Earned on Accounts Jhevon received $1000 from family members for his birthday. He plans to buy a car in the near future and he is putting all of the birthday money toward the purchase. On April 1, he opened a savings account and deposited the $1000. The account pays an annual interest rate of 3.65%, compounded daily / 100 = (a) How much will Jhevon s deposit be worth in 30 days? How much interest was earned? Need to express in terms of years 30 / 365 = Method 1: Using the compound interest formula n A P( 1 i) A 1000( ) 30 A 1000(1.0001) A 1000(1.003) A $ Jhevon s deposit will be worth $ in 30 days. Interest earned = A (final amount) P (Principal amount) = $ = $3 Jhevon earned $3 in interest. NEXT
5 EXAMPLE 1 Interest Earned on Accounts Jhevon received $1000 from family members for his birthday. He plans to buy a car in the near future and he is putting all of the birthday money toward the purchase. On April 1, he opened a savings account and deposited the $1000. The account pays an annual interest rate of 3.65%, compounded daily. (a) How much will Jhevon s deposit be worth in 30 days? How much interest was earned? Need to express in terms of years 30 / 365 = Method 2: Using the TVM Solver N = (30/365) x 1 I% = 3.65 PV = 1000 PMT = 0 FV = P/Y = 1 C/Y = 365 Daily compounding 365x per year Jhevon s deposit will be worth $ in 30 days. Interest earned = A (final amount) P (Principal amount) = $ = 1000 = $3 Jhevon earned $3 in interest. Expressed as negative Money being paid out Press ALPHA then ENTER
6 EXAMPLE 1 Interest Earned on Accounts Jhevon received $1000 from family members for his birthday. He plans to buy a car in the near future and he is putting all of the birthday money toward the purchase. On April 1, he opened a savings account and deposited the $1000. The account pays an annual interest rate of 3.65%, compounded daily / 100 = (b) How much will Jhevon s deposit be worth in 150 days? How much interest was earned? Need to express in terms of years 150 / 365 = P = Method 1: Using the compound interest formula n A P( 1 i) A 1000( ) 150 A 1000(1.0001) A 1000( ) A $ Jhevon s deposit will be worth $ in 150 days i = r / N = / 365 = n = yn = (0.4100)(365) = 150 Represents daily compounding (365x per year)
7 EXAMPLE 1 Interest Earned on Accounts Jhevon received $1000 from family members for his birthday. He plans to buy a car in the near future and he is putting all of the birthday money toward the purchase. On April 1, he opened a savings account and deposited the $1000. The account pays an annual interest rate of 3.65%, compounded daily / 100 = (b) How much will Jhevon s deposit be worth in 150 days? How much interest was earned? Need to express in terms of years 150 / 365 = Method 1: Using the compound interest formula n A P( 1 i) A 1000( ) 150 A 1000(1.0001) A 1000( ) A $ Jhevon s deposit will be worth $ in 150 days. Interest earned = A (final amount) P (Principal amount) = $ = $15.11 Jhevon earned $15.11 in interest. NEXT
8 EXAMPLE 1 Interest Earned on Accounts Jhevon received $1000 from family members for his birthday. He plans to buy a car in the near future and he is putting all of the birthday money toward the purchase. On April 1, he opened a savings account and deposited the $1000. The account pays an annual interest rate of 3.65%, compounded daily. (b) How much will Jhevon s deposit be worth in 150 days? How much interest was earned? Need to express in terms of years 150 / 365 = Method 2: Using the TVM Solver N = (150/365) x 1 I% = 3.65 PV = 1000 PMT = 0 FV = P/Y = 1 C/Y = 365 Jhevon s deposit will be worth $ in 150 days. Expressed as negative Money being paid out Press ALPHA then ENTER Daily compounding 365x per year Interest earned = A (final amount) P (Principal amount) = $ = 1000 = $15.11 Jhevon earned $15.11 in interest.
9 EXAMPLE 2 Service Charges Cindy s bank charges $6.95 for up to 10 ATM (bank machine) transactions per month plus $0.60 for each additional transaction ATM transaction. The bank also charges $0.55 for each cheque transaction. In November, she made eight ATM transactions and no cheque transactions. In December, she made 23 ATM transactions and three cheque transactions. Determine the service charges deducted from Cindy s account balance
10 EXAMPLE 2 Service Charges Cindy s bank charges $6.95 for up to 10 ATM (bank machine) transactions per month plus $0.60 for each additional transaction ATM transaction. The bank also charges $0.55 for each cheque transaction. In November, she made eight ATM transactions and no cheque transactions. Determine the service charges deducted from Cindy s account balance (a) In November Since Cindy made less than 10 ATM transactions and issue no cheques, she is only charged the monthly fee of $6.95
11 EXAMPLE 2 Service Charges Cindy s bank charges $6.95 for up to 10 ATM (bank machine) transactions per month plus $0.60 for each additional transaction ATM transaction. The bank also charges $0.55 for each cheque transaction. In December, she made 23 ATM transactions and three cheque transactions. Determine the service charges deducted from Cindy s account balance (a) In December Cindy s monthly charge (up to 10 ATM transactions) = $6.95 Additional ATM transactions = 13 x $0.60 = $7.80 # of cheque transactions = 3 x $0.55 = $1.65 Total = $ = $16.40 In the month of December, Cindy will pay $16.40
12 Homework: Page #1 10
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Consumer and Mortgage Loans. Assignments
Financial Plan Assignments Assignments Think through the purpose of any consumer loans you have. Are they necessary? Could you have gotten by without them? If you have consumer loans outstanding, write