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10.1 Passbook Savings Account

Learn about savings accounts, compound interest, special accounts, promissory notes, and installment buying. Discover the key principles and calculations involved in managing your finances effectively.

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10.1 Passbook Savings Account

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  1. 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

  2. SIMPLE INTEREST I= principal x rate x time I = 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

  3. 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 1 Ex. Principal = $1,000 Rate = 5% Compounded: quarterly Find total interest for 1 year.

  4. Effective Rate of Interest: Amount of interest for 1 year Amount of money on deposit

  5. 10.2 Special Savings Accounts • Banks pay a higher rate of interest on these special accounts Why?? The banks keep the customers’ money on deposit for a specific period of time without making any withdrawals. 2 Types: • Time deposit: aka certificate of deposit • Money market account

  6. 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 What happens if funds are withdrawn before maturity?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!

  7. Money market accounts • Interest paid is fixed for short periods of time. • Withdrawals can be made as long as minimum is maintained.

  8. 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

  9. 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 borrowed • Date of note = when it is signed • Maturity date = date $ must be repaid I = prt http://static.howstuffworks.com/pdf/samp-promissory.doc

  10. 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) = $420 How much is due at maturity? $3,000 + 420 = $3,420

  11. 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) = $15.62 BANKER: $1,000(0.06)(95/360) = $15.83

  12. 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) = $120 Rate = $120/$1,000 = 0.12 = 12%

  13. Discounted notes = interest is paid in advance aka noninterest-bearing note Rate of discount ≈ rate of interest I=prt Proceeds = Face amount – interest Real rate of interest = interest for 1 year proceeds

  14. 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) = $56.25 Proceeds = $2,500 – 56.25 = $2,433.75 Find the real rate of interest. Interest for 1 year = $56.25(4) = $225 Rate = $225 ÷ $2,433.75 = 0.092 = 9.2%

  15. 10.4 Interest and Date Tables Use table on page 371 Interest 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=$27.74 or 0.3699+0.7397=1.1096*25=$27.74

  16. DUE DATES Find the maturity date of a note! Remember! February = 28 days (leap=29) Sept, April, June, Nov = 30 days All the rest = 31 days Finding due date when time is in MONTHS April 21 – 2 months – DUE: June 21 Dec 22 – 3 months – DUE: Mar 22 June 15 – 6 months – DUE??? January 31 – 1 month – DUE???

  17. Finding due date when time is in DAYS Count 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!

  18. 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 – cash price

  19. 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!

  20. 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.

  21. Your loan is for $250 repaid in 5 monthly payments. Finance charge 1% on unpaid balance.

  22. 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

  23. 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? • How much did Tattoo, Inc pay the credit card company? • $5,400(0.03) = $162 • Find Tattoo, Inc. net receipts. • $5,400 – 162 = $5238

  24. 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.

  25. 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

  26. Ex. Dee borrowed $600 on a cash advance for 30 days on her credit card. The finance charge rate was 0.0635% per day. What total finance charge did she pay? 0.0635% = 0.000635 .000635 x 30 x 600 = $11.43 finance charge

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