10.1 passbook savings account why do people open savings accounts? keep their money safe earn...
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10.1 Passbook Savings Account
Why do people open savings accounts? Keep their money safe Earn interest on their money! Interest: money paid by the bank for
using somebody else’s money
SIMPLE INTERESTI= principal x rate x timeI = p•r•t
time: semiannual=2x a year = ½ quarterly = 4x a year = ¼
Ex. If interest is paid at the rate of 6% a year,
what is the interest on $270 for 1 quarterly period?I = (270)(.06)(1/4) = $4.05
COMPOUNDING INTEREST add interest to the principal to make a new
principal For quarterly, interest is paid on Jan 2, Apr 1,
Jul 1 and Oct 1Ex.Principal = $1,000Rate = 5%Compounded: quarterlyFind total interest for 1 year.
10.2 Special Savings Accounts Banks pay a higher rate of interest on
these special accountsWhy??The banks keep the customers’ money on
deposit for a specific period of time without making any withdrawals.
2 Types:1. Time deposit: aka certificate of
deposit2. Money market account
Time deposit aka certificate of deposit (CD’s)
Requirements: Minimum deposit amount Leave $ on deposit for a minimum time
(term). The end of the term is called maturity date.
What happens if funds are withdrawn before maturity? PAY PENALTY!
Money market accounts
Interest paid is fixed for short periods of
time. Withdrawals can be made as long as
minimum is maintained.
Ex. Harry invested $3,000 in a 1-year term CD that paid interest of 8% a year. If he withdrew $500 before the term ended, what was the amount of the penalty if penalty was 6 months worth of interest?
6 months = ½ year Penalty = $500(0.08)(.5) = $20
If his account has already earned interest of $140, what is the amount of net interest earned? $140 – 20 = $120
10.3 Promissory Notes A written promise to pay A note that requires you to pay
interest is an interest-bearing note:Face= principal = amount borrowedDate of note = when it is signedMaturity date = date $ must be
repaid
I = prt
http://static.howstuffworks.com/pdf/samp-promissory.doc
Ex.
Frank borrowed $3,000 from the bank. The rate of interest that he must pay is 7%. How much interest does he pay at the end of 2 years?
I=(3,000)(.07)(2) = $420How much is due at maturity?
$3,000 + 420 = $3,420
Exact interest and banker’s interest(use when time is given in days)
Exact interest: uses a 365-day year Banker’s interest: uses a 360-day year
Ex. Find exact and banker’s interest:
The loan is for $1,000 at 6% for 95 days.EXACT: $1,000(0.06)(95/365) = $15.62BANKER: $1,000(0.06)(95/360) = $15.83
Rate of interest
= interest for 1 whole year ÷ principal
Ex. Ella paid $30 interest on a loan of $1,000 for 3 months. Find the rate of interest that she paid.
12 months in 1 year, so 12÷3 months = 4$30 (4) = $120Rate = $120/$1,000 = 0.12 = 12%
Discounted notes = interest is paid in advance
aka noninterest-bearing note
Rate of discount ≈ rate of interestI=prt
Proceeds = Face amount – interestReal rate of interest = interest for 1 year proceeds
Ex
The bank discounted a $2,500 note for Sam at 9% interest for 3 months. Find the proceeds of the note.
I = prt = (2,500)(.09)(3/12) = $56.25Proceeds = $2,500 – 56.25 = $2,433.75
Find the real rate of interest.Interest for 1 year = $56.25(4) = $225Rate = $225 ÷ $2,433.75 = 0.092 = 9.2%
10.4 Interest and Date Tables
Use table on page 371Interest is for EVERY $100!!!Ex1: Find the interest on $570 for 15 days
at 11.5%570/100 = 5.7
5.7(0.4726) = $2.69 = interest!Ex2. Find interest on $2,500 for 45 days
at 9%2,500/100 = 25 (0.3699)*3=1.1097*25=$27.74or 0.3699+0.7397=1.1096*25=$27.74
DUE DATESFind the maturity date of a note!Remember! February = 28 days (leap=29)Sept, April, June, Nov = 30 daysAll the rest = 31 days
Finding due date when time is in MONTHSApril 21 – 2 months – DUE: June 21Dec 22 – 3 months – DUE: Mar 22June 15 – 6 months – DUE???January 31 – 1 month – DUE???
Finding due date when time is in DAYSCount the days in between!Ex.1 Find the maturity date of a 90-day
note dated June 6.90
June: -24 (days left)66
July: -31 (total days)35
August: -31 (total days) 4
Maturity date = Sept. 4!
10.5 Installment Buying
Installment plan = paying for money owed in parts
Downpayment = part of price paid at once
Finance charge = added to purchase price; cost of doing business
Finance charge = installment price – cashprice
Ex1. The installment price of a CD player is $400. You must pay $40 down and make payments for 20 months. What will be your monthly payments?
$400 – 40 = $360$360 ÷ 20 = $18/ month
Ex2. A camera has a cash price of $1,300. You pay $130 down and $75/month for 18 months. Find the finance charge.
$75(18) = $1,350 + 130 = $1,480$1,480 – 1,300 = $180 finance charge!
By what % is the installment price greater than the cash price?
$180÷ 1,300 = 0.13846 = 13.8%
Installment loan = interest is added to unpaid balances.
Collateral=deposit or property as security for a loan; examples are cars, stocks, bonds, and life insurance.
Annual percentage rate (APR) = shows the ratio of the finance charges to the amount financed or borrowed.
Your loan is for $250 repaid in 5 monthly payments. Finance charge 1% on unpaid balance.
Month Unpaid balance
Finance charge
Principal Total payment
1 $250 $50
2
3
4
5
10-6 Credit Cards
Credit cards can be used for the purchase of merchandise or services instead of cash or checks.
What are advantages/disadvantages to using a credit card?
Sample statement
Providing credit service costs stores/services money!
Ex. Tattoo, Inc. accepts Citibank credit cards. Tattoo, Inc. had total credit sales of $5,400. Citibank charges 3% of sales for its services?a.How much did Tattoo, Inc pay the credit card company?
$5,400(0.03) = $162
b.Find Tattoo, Inc. net receipts.$5,400 – 162 = $5238
10-6 cont’d…
When using a credit card:•Ideally, you would want to pay your credit card balance in full. If you don’t, interest is charged.
•Credit card companies allow you to use cash advance slips or ATM withdrawals. Interest is charged at a DAILY interest rate.
•Some credit cards charge an annual fee.
Ex. Midwest Card charges a $22 annual fee and a finance charge of 1.3% a month on all unpaid balances. In May, Midwest charged you the membership fee and a finance charge on your $450 unpaid balance. What was the balance on your May statement?Finance charge = $450 x 0.013= $5.85
$450 + 5.85 + 22 =$477.85 balance