Chapter 3: Banking Services

Transcription

1 Chapter 3: Banking Services Section 3.3 Savings Accounts Wednesday January 18th,

2 Section 3.3 Savings Accounts Turn in S1 Cumulative Review assignment Checking Accounts Quiz Results - quiz corrections until next Thursday! Section 3.3 Savings Accounts and Simple Interest - Notes and Examples 2

3 KEY TERMS 3

4 Types of Personal Savings Accounts You can open various types of personal savings accounts with financial institutions, brokers and investment firms. Savings accounts offer low returns compared with most other investments, but are low risk and a good way to earn interest until you are ready to move funds into higherreturn investments, such as stocks and bonds. The following types of saving accounts are insured by the FDIC or NCUA. 1. A regular savings account is an account in which the financial institution pays interest for the use of the money deposited into the account. This money is then used by the bank to give out loans. Interest earned on a regular savings account is usually a fixed rate and is lower than interest earned on a money market account or on a certificate of deposit (CD). 2. Money market account has a higher interest rate compared to a regular savings account but requires a greater initial deposit and a greater minimum balance. You may be limited to a certain amount of transactions per month. The interest rate is a variable interest rate and usually changes weekly. 3. A certificate of deposit (CD) is a certificate that states that you have a specific sum on deposit and guarantees the payment of a fixed interest rate until maturity. You will be charged a high penalty if you make deposits or withdrawals from the CD before maturity. 4

5 SIMPLE INTEREST Interest is based on interest rate and principal. There are two classifications of interest: Simple Interest and Compound Interest. Simple Interest is calculated on principal only. Simple Interest Formula: where I = prt I = Simple Interest ($ earned) p = principal (beginning/original balance; amount deposited) r = annual interest rate (change % to a decimal) t = time (based in terms of a year) 5

6 Grace wants to deposit $5,000 in a certificate of deposit (CD) for a period of two years. She is comparing interest rates quoted by three local banks and one online bank. Write the interest rates in ascending (lowest to highest) order. Which bank pays the highest interest for this two year CD? First State Bank: 4 % E Save Bank: 4 % Johnson City Trust: 4.22% Land Savings Bank: 4.3% Solution: 4.22%, 4 % (4.25%), 4.3%, 4 % (4.375%) E Save bank pays the highest interest on the two year CD. 6

7 Calculate the simple interest. Mitchell deposits $1,200 in an account that pays 4.5% simple interest. He keeps the money in the account for three years without any deposits or withdrawals. How much is in the account after three years? Use Simple Interest Formula: I = prt I =? p = 1,200 I = 1,200(.045)(3) r = 4.5% =.045 I = 162 t = 3 The account gains $162 in interest over 3 years. Find total amount in account: 1, = 1,362 The total amount in the account after 3 years is $1,362. 7

8 How much simple interest is earned on $4,000 in 3½ years at an interest rate of 5.2%? Use Simple Interest Formula: I = prt I = 4,000(0.052)(3.5) I = 728 The total interest earned in 3½ years is $728. 8

9 How much simple interest does $2,000 earn in 7 months at an interest rate of 5%? Change the time in terms of years: 7 months = 7/12 Use simple interest formula: I = prt I = 2,000(0.05)(7/12) I The account earns $58.33 in 7 months. 9

10 Example 4: How much simple interest would $800 earn in 300 days in a non-leap year at an interest rate of 5.71%? Round to the nearest cent. Change the time in terms of years: 300 days = 300/365 Use simple interest formula: I = prt I = 800(0.0571)(300/365) I The account earns $37.55 in interest for 300 days. 10

11 Example 5: Calculate the principal. How much principal must be deposited to earn $1,000 simple interest in 2 years at a rate of 5%? Use simple interest formula: I = 1000 I = prt p =? 1000 = p(0.05)(2) (Plug in given values) r = = p(.1) (Simplify right side) t = = p(.1) (Isolate p by dividing by.1) ,000 = p or p = 10,000 A principal of $10,000 must be deposited. 11

12 CHECK YOUR UNDERSTANDING: How much principal must be deposited in a twoyear simple interest account that pays 3¼% interest to earn $300 in interest? Round to the nearest cent. Use simple interest formula: I = 300 I = prt p =? 300 = p(0.0325)(2) (Plug in given values) r = = p(.065) (Simplify right side) t = = p(.065) (Isolate p by dividing by.065 ) , = p or p = 4, A principal of $4, must be deposited. 12

13 Example 6: Calculate time. Derek has a bank account that pays 4.1% simple interest. The balance is $910. When will the account grow to $1,000? Answer in months. Use simple interest formula: I = = 90 I = prt p = = 910(0.041)t (Plug in given values) r = = 37.31t (Simplify right side) t =? (Isolate t by dividing by 37.31) 2.4 years t or t 2.4 years (about 2 yrs and 5 months) (2.4)(12) = 28.8 Derek's account will grow to $1,000 in approximately 29 months. 13

14 Example 7: Calculate the interest rate. Kerry invests $5,000 in a simple interest account for 5 years. What interest rate must the account pay so there is $6,000 at the end of 5 years? Use simple interest formula: I = = 1000 I = prt p = 5,000 1,000 = 5,000(r)(5) (Plug in given values) r =? 1,000 = 25,000r (Simplify right side) t = 5 years 1,000 = r (Solve for r) 25,000 r =.04 = 4% The account must pay 4% annual simple interest. 14