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A Dollar Saved… Chapter 3

A Dollar Saved… Chapter 3. 3-1 Savings 3-2 Compound Interest 3-3 The Federal Reserve. A Dollar Saved… Chapter 3. After completing this chapter, you should be able to determine factors that affect returns on savings compare types of and calculate interest on savings accounts

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A Dollar Saved… Chapter 3

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  1. A Dollar Saved…Chapter 3 3-1 Savings 3-2 Compound Interest 3-3 The Federal Reserve

  2. A Dollar Saved…Chapter 3 After completing this chapter, you should be able to • determine factors that affect returns on savings • compare types of and calculate interest on savings accounts • identify the functions and policies of the Federal Reserve • observe and calculate the multiplier effect on the nation’s money supply

  3. 3-1 Savings: Save Now – Buy Later Warm-up Word Definition Symbol/Formula • Bar graph • Certificate of Deposit • Commercial Banks • Credit Unions • Interest • Interest Rate • Liquidity

  4. 3-1 Savings: Save Now – Buy Later Warm-up Word Definition Symbol/Formula • Money Market Account • Principal • Passbook/Regular Savings Account 11. Savings & Loan Associations 12. Savings Banks • Simple Interest

  5. 3-1 Savings: Save Now – Buy Later Skill 1: Simple interest Simple Interest = prinicipal ∙ rate ∙ time i = prtwhere i = interest p = principal r = interest rate t = time Total savings = weekly savings ∙ number of weeks Balance = principal + interest B = p + i

  6. 3-1 Savings: Save Now – Buy Later Example Maria can save $85 per week from her paycheck. After saving for a year, she decides to buy a one-year CD that pays 4% simple interest. 1. How much will Maria save in 52 weeks? Total savings = weekly savings ∙ number of weeks = 85 ∙ 52 = $4,420

  7. 3-1 Savings: Save Now – Buy Later Example cont. Maria can save $85 per week from her paycheck. After saving for a year, she decides to buy a one-year CD that pays 4% simple interest. 2. How much interest will the CD earn in 1 year? i = prt i = 4420(4%)1 i = $176.80

  8. 3-1 Savings: Save Now – Buy Later Example cont. Maria can save $85 per week from her paycheck. After saving for a year, she decides to buy a one-year CD that pays 4% simple interest. 3. How much will Maria’s CD be worth after 1 year? B = p + i B = 4420 + 176.80 B = $4596.80

  9. 3-1 Savings: Save Now – Buy Later Skill 2: Time needed to save money Weeks needed = cost of item ÷ amount saved each week

  10. 3-1 Savings: Save Now – Buy Later Example Maria’s friend Dwight wants to buy a golf bag. He finds one on sale for $59.84. The sale price will be in effect for 1 month. If Dwight can save $22 per week, will he have enough money to buy the bag before the sale is over? Weeks needed = cost ÷ amount saved = 59.84 ÷ 22 = $2.72 ≈ 3 weeks Yes, he will be able to buy the golf bag before the sale ends.

  11. 3-2 Compound Interest: Money That Grows Warm-up Word Definition Symbol/Formula • Compound Interest • Compounded Quarterly • Compounded Semiannually • Rule of 72

  12. 3-2 Compound Interest: Money That Grows Skill 1: Semiannual interest Semiannual Interest = prinicipal ∙ semiannualrate÷ 2 i = pr/2 where i = interest p = principal r = interest rate

  13. 3-2 Compound Interest: Money That Grows Example Nelson’s parents have a CD in the amount of $10,000. It is held by a bank that pays 5% interest, compounded semiannually. How much will Nelson’s parents have in this account after 2 years? i = pr/ 2 i = 10,000(5%)/2 i = 10,250(5%)/2 i = $250 (6mths) i = $256.25 (1yr) i = 10,506.25(5%)/2 i = 10,768.91(5%)/2 i = $262.66 (1½ yr) i = $269.22 (2yrs) After 2 years, there will be $11,038.13.

  14. 3-2 Compound Interest: Money That Grows Skill 2: Compound interest Compound Interest B = p(1 + r)n where B = balance p = original principal r = interest rate for the time period n = total number of time periods

  15. 3-2 Compound Interest: Money That Grows Example Nelson’s parents have a CD in the amount of $10,000. It is held by a bank that pays 5% interest, compounded semiannually. How much will Nelson’s parents have in this account after 5 years? B = p(1 + r)n B = 10,000(1 + 5%/2)10 B = $12,800.85

  16. 3-2 Compound Interest: Money That Grows Skill 3: Rule of 72 Rule of 72 72/annual interest rate ∙ 100 = years to double Example Nelson invests $10,000 in a CD that pays 6%compounded quarterly. How long will it take his investment to double? 72/6% ∙100 = 12 years

  17. 3-3 The Federal Reserve: The Bank’s Bank Warm-up Word Definition Symbol/Formula • Common Ratio • Consumer Price Index • Easy-money Policy • Excess Reserves • Federal Reserve Note • Federal Reserve System • Geometric Series

  18. 3-3 The Federal Reserve: The Bank’s Bank Warm-up Word Definition Symbol/Formula • Inflation • Legal Tender • Money Supply • Multiplier Effect • Required Reserve • Sum of an Infinite Geometric Series • Tight-money policy

  19. 3-3 The Federal Reserve: The Bank’s Bank Skill 1: Multiplier effect For demand deposits • Required reserve 20% • Loans and investments 80% Loans and investments are redeposited in the banking system to create extra money or credit.

  20. 3-3 The Federal Reserve: The Bank’s Bank Example Olivia wants to find out the multiplier effect on an initial deposit of $1000 through five levels. What is the total amount of extra money or credit created through five levels of the multiplier effect? Original loans/investments = 1000(80%) = $800 Original reserve = 1000(20%) = $200

  21. 3-3 The Federal Reserve: The Bank’s Bank Example cont. Total money created = $2689.28

  22. 3-3 The Federal Reserve: The Bank’s Bank Skill 2: Sum of an infinite geometric series Sum of an Infinite Geometric Series S = a where S = sum of the series 1 – r a= the 1st term in the series r = the common ratio (0.8)or Multiplier = original deposit + sum of the series original deposit

  23. 3-3 The Federal Reserve: The Bank’s Bank Example Olivia wants to find out the maximum multiplier effect on an initial deposit of $1000. What is the maximum amount of money his deposit can create and what is the multiplier? S = a Multiplier = 1000 + 4000 1 – r 1000 = 800 = 5 1 – 0.8 S = $4000

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