Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 1 Chapter 10 Compound Interest and Inflation Section 2 Interest-Bearing Bank Accounts and Inflation

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 2 Objectives 1.Define passbook, savings, and other interest- bearing accounts. 2.Find interest compounded daily. 3.Define time deposit accounts. 4.Define inflation and the consumer price index. 5.Examine the effect of inflation on spendable income. 6.Understand the role of the government related to inflation.

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 3 Passbook, Savings and other Interest- Bearing Accounts Savings accounts, passbook accounts, money market accounts, other interest-bearing accounts – can be a safe place to deposit money Commonly insured by FDIC up to $250k Many require minimum balance Interest varies from less than 1% to more than 5% per year

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 4 Passbook, Savings and other Interest- Bearing Accounts Interest often compounded daily Truth in Savings Act of 1991 – Regulation DD, interest must be based on exact number of days Interest-bearing checking accounts – often require minimum balance Can write checks on the account

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 5 Interest-Bearing Checking Accounts Often require minimum balance If balance falls too low, a fee is charged Can write checks on the account Maximizes amount of interest by leaving money in an interest-paying account as long as possible

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 6 Find Interest Compounded Daily Uses same formula M = (1 + i) n Interest accrued every day, credited to account once per quarter or once per month Annual interest rate divided by 365 days Tedious calculations so use table Compound amount = Principal × Number from table Interest = Compound amount – Principal

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 7

8 Example Sasha Grainger received $10,000 from a divorce settlement. She plans to use the money for a down payment on a new house but decides to wait 90 days when her job isn’t as busy. She puts her money in a savings account earning 3 1/2 % interest compounded daily for 90 days. Find the amount of interest she will earn.

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 9 Example (cont) Table value for 60 days is Compound interest = $10,000 × =10, Interest = $10,086.67– $10,000 = $86.67

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 10 Example A money market ac-count is opened on April 10 with a $8500 deposit and an additional deposit of $1500 is made on May 5. Find the total in the account on June 30 and the interest if the interest is 3 1/2 % compounded daily.

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 11 Define Time Deposit Accounts Time deposits – banks pay higher interest rates on funds left on deposit for longer time periods Certificate of deposit (CD) – requires a minimum amount of money, minimum period of time The following table assumes daily compounding

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 12 Compound Interest for Time Deposit Accounts Compounded Daily

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 13 Example To receive a Wells Fargo loan, Jordan Swanson plans requires $18,000 in collatera. Therefore, Jordan deposits $18,000 with the bank in a 2-year certificate of deposit yielding 3% compounded daily. Find the compound amount and interest.

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 14 Example (cont) Look at the table for 3% and 2 years, finding Compound amount = $18,000 × = $ Interest = $19, – $18,000 = $1,113.01

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 15 Define Inflation Inflation results in a continual rise in the price of goods and services A dollar is worth less each year Have to earn more money each year to buy the same goods and services

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 16 Define Consumer Price Index CPI or cost of living index – used to track inflation Calculated by government Measures average change in prices from one year to the next for common group of goods and services (food, housing, fuel, utilities, apparel, transportation, insurance, health care, even pet care)

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 17 Examine the Effect of Inflation on Spendable Income Inflation reduces buying power

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 18 Example Inflation from one year to the next was 4.8% as measured by the CPI. (a) Find the effect of the increase on a family with an after-tax annual income and budget of $39,600 (after taxes). (b) What is the overall effect if the family members receive only a 2% (after tax) increase in pay for the year?

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 19 Example (cont) (a)Percent problem. The cost of the goods and services that this family buys went up by 4.8% as measured by the CPI..048 × $39,600 = $ Therefore next year these same goods and services will cost the family $39,600 + $ = $41,500.80

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 20 Example (cont) (b)The family’s income went up 2% after taxes, or by.02 × $39,600 = $792 Their new income is $39,600 + $792 = $40,392 In effect, the family loses $41, – $40,392 = $ in purchasing power.