3.7 Money Market and CD Accounts Business Math 3.7 Money Market and CD Accounts

Goals Calculate Interest earned on special savings accounts Calculate the penalty for early withdrawals from CD accounts Compare the interest earned on savings accounts Calculate the effective rate of interest

Start up Banks often pay a higher interest rate on savings accounts to customers who keep their money on deposit for a fixed period of time, such as a year, and not make any withdrawals. Name reasons why banks encourage people to use such savings accounts. Math Builder – page 118

Special Savings Accounts Certificates of Deposit – widely referred to as a CD. The CD is also known as a time deposit or a savings certificate Most banks require the depositors to meet the following requirements: Deposit a minimum amount Leave the money on deposit for a minimum amount of time. This time frame is referred to as the term. Pay a penalty if money is withdrawn before the end of the term

Money Market Accounts These accounts offer higher rates than savings account but also have restrictions: Minimum Balance must be kept in the account for the term specified. More money can be added at any time. Interest rate paid is fixed for short periods of time A small number of checks can be drawn against the account Interest paid on this account and CD’s may be simple interest paid at the end of the term Example 1 then Check for understanding

Penalties on Certificates of deposit By law, banks must charge a penalty for withdrawing money early from a CD. Penalties are calculated on the money withdrawn before the end of the term. The penalty may be higher than the interest earned Example 2 Check for understanding C and D page 120

Compare Savings Accounts Example 3 Check for understanding E and F

Effective Rate of Interest The effective rate of interest is the rate you actually earn by keeping your money on deposit for a year. The effective rate is sometimes called the annual percentage rate Effective rate of interest = Amount of interest earned for a year Amount of money on deposit Example 4 Check for understanding G and H page 122

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