Checking Accounts

Checking Accounts Chapter 5

Bell Work: Add. • 82.22 + 51.27 • 82.637 + 92.727 Change the percents to decimals. 3. 37.5% 4. 9%

5.1 Deposits Opening a Savings Account: To open a savings account, which is a specific kind of bank account that earns interest, you must make a deposit. A deposit is the money you put into the bank, savings and loan, credit union, or brokerage firm.

You can make a deposit at an ATM, in person, by direct deposit, or by electronic transfer. There are several ways to transfer funds; evaluate what is right for you.

Each time you make a deposit, it is added to your account’s balance. To make a deposit in person, you fill out a savings account deposit slip to record any cash or checks you are depositing. If you want to receive cash back, subtract the amount from the subtotal to find the total deposit amount.

Formula: Total Deposit= (Checks + Cash)- Cash Received

Example: USE DEPOSIT SLIP IN YOUR NOTES: Robert wants to deposit the following into his savings account: $78.40, a check for $29.34 and a check for $124.19. He wants to receive a $50.00 bill in cash. How much will he deposit?

5.2 Withdrawals When you make a withdrawal, you are taking money out of your bank account. Your withdrawal is subtracted from the account’s balance. When making a withdrawal from a savings account, you fill out a withdrawal slip.

On it, you need to write dollar amounts in word form with the decimal portion as a fraction. (You learned how to do this in Chapter 4 Checking Accounts.) If he amount in word form does not match the amount in numeral form the bank will ONLY honor the word form.

Practice: Write each of the following as words or a numeral. • $45.00 • $355.34 • Twenty-five and 50/100 dollars

bell work: 1. Complete the deposit slip for your savings account: $45.60 cash, a check for $32.13, another check for $234.45. You would like to receive $60 cash back. 2. Write the following in words: $34.89

5.3 Account statements When you have a savings account, your bank may mail or make available on the Internet a monthly or quarterly account statement. The bank’s account statement shows the status of your account.

Example: Looking at Lauren’s statement in your notes. After checking to be sure all transactions have been recorded correctly, she checks the calculations. What is the balance in her account July 1?

5.4 Simple interest When you deposit money into a savings account, you are permitting the bank to use the money. The bank pays interest, the amount of money paid for the use of a lender’s money.

The most common method for calculating interest is the simple interest formula. This is the interest paid on the original principal, the amount of money earning interest.

Simple interest is based on three factors: the principal; annual interest rate (the percent of the principal earned as interest in one year); and the amount of time for which the principal is borrowed or invested.

To compute interest: Interest= Principal x Rate x Time OR I= prt

That formula expresses the rate as percent and the time in years or a fractions of a year. If the interest is computed and then deposited into the account, you have a new quantity called the amount.

Amount = Principal + Interest OR A= P + I

Example: Joyce deposits $9,000 in an account that pays an annual 5.5% interest rate. Determine the simple interest and the amount in the account for (a) 3 years, (b) 3 months, and (c) 3 days

Interest for 3 years • Interest for 3 months • Interest for 3 days

Bell work: Determine the interest and the amount for the indicated time. Principal: $4,000 at 6% for (a) 4 years, (b) 4 months and (c) 4 days.

5.5 Compound interest Interest that you earn in a savings account during an interest period is added to your account. Your new balance is used for calculating the interest for the net interest period, the interest period after that, and so on.

Compound interest earns interest not only on the original principal but also on the interest earned during previous interest periods, earning interest on interest.

Adding interest to an initial principal, thus forming a new and larger principal in the next period, is the procedure for computing compound interest. The first step in computing compound interest is to use this formula: Amount= Principal + Interest

Again, the amount is the balance in the account at the end of an interest period. When you have the amount, you do a series of simple interest computations. To find the compound interest, you find the difference between the amount in the account and the original principal. Formula: Compound Interest = Amount – Original Principal

Example: Jamal deposited $1,000 in a savings account that earns 6% interest compounded quarterly. He made no other deposits or withdrawals. What was the amount in the account and the end of one year? How much is the compound interest?

5.6 compound interest table To compute compound interest quickly, you can use a compound interest table, which shows the amount of $1.00 for many interest rates and interest periods. To utilize the table, you must know the total number of interest periods and the interest rate per period.

Formulas: Amount = Original Principal x Amount of $1.00 Compound Interest = Amount – Original Principal

Example: State Bank pays 6% interest compounded quarterly on regular savings accounts. Marta Carmona deposited $3,000 for 2 years. She made no other deposits or withdrawals. How much interest did Marta earn during the 2 years? (Note: Use table page All)

5.7 Daily compounding The more often banks compound interest, the more potential you have to earn more interest. Many banks offer savings accounts with daily compounding. When they compound interest daily, it is computed each day and added to the account balance. The account will earn interest from the day of deposit to the day of withdrawal.

We can use the formulas from the previous sections: Amount = Original Principal x Amount of $1.00 Compound Interest = Amount – Original Principal

Example: Suppose you deposit $8,000 in an account that pays 5.5% interest compounded daily. How much interest will you earn in 31 days?

5.8 Annuities Financial advisors recommend that their clients make regular deposits in a savings plan, such as an Individual Retirement Account (IRA). An account into which someone deposits an equal amount of money at equal periods or equal intervals of time is an annuity.

2 types of annuity Ordinary annuity occurs when equal deposits are made at the end of each interest period. Annuity Due occurs when you make regular deposits at the beginning of the interest period. The money immediately starts earning interest because it is deposited at the beginning of the interest period.

The futurevalue of an annuity is the amount of money in the annuity account at the end of a specific period of time. To compute the future value of an ordinary annuity use this formula: Future Value = Amount of Deposit x Future Value of $1.00

To compute the total interest, use this formula: Total Interest = Future Value – Total of all Deposits

Example: Phil deposits $500 in an ordinary annuity at the end of each quarter. The account earns 6% interest compounded quarterly. What is the future value of the account in 2 years? How much interest has it earned?

Checking Accounts