Business Math 3.6 Savings Account

Goals Calculate simple interest on savings deposit Calculate compound interest on savings deposit Calculate interest using a compound interest table

Start up Banks provide protection for your money when you open a savings account. They also pay you interest. Why do they pay you interest? Math builder page 111

Simple Interest INTEREST IS THE MONEY PAID TO AN INDIVIDUAL OR INSTITUTION FOR THE PRIVILEDGE OF USING THEIR MONEY There are several types so savings accounts Passbook account – simple interest is figured quarterly or 4 times a year. Sometimes it is paid twice a year semiannually Find the interest that would be earned for an entire year by multiplying the interest rate by the account balance. The multiple your answer by 1/ the number of times interest is paid in a year ¼ for quarterly interest ½ for semiannual interest Example 1 then check for understanding page 112

Compound interest Compound interest is when you get interest on any previous interest paid. The total money in the savings at the end of the last time interest was calculated is called the compound amount The total interest earned is the difference between the original principal and the compound amount Both assume not additional deposits or withdrawals Example 2 and check for understanding page 113

Compound interest table Page 113 Table shows the value of $1 after it is compounded for various interest rates and periods Top part of the table calculates annual interest The bottom part calculates daily interest Example 3 Check for understanding 114 Example 4 the check for understanding page 115

Wrap Up Banks pay interest to you as an incentive to deposit your money. In turn, the banks lend your money to someone else at a higher interest rate than you are paid. The difference between the amount paid to you and the amount collected from the borrower is profit that the bank keeps