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Chapter 5 Savings Account.

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Presentation on theme: "Chapter 5 Savings Account."— Presentation transcript:

1 Chapter 5 Savings Account

2 Section 5.1 – Deposits A savings account is a special bank account that earns interest In order to open a savings account, you must make a deposit money you give the bank to hold in your savings account

3 Section 5.1 – Deposits Each time a deposit is made, it is added to your account’s balance Use a savings account deposit slip Total Deposit = (Currency + Coins + Checks) – Cash Received

4 Deposits – Example 1 Gustavo Barrera has a check for $ and a check for $ He also has 14 one-dollar bills. He would like to receive $20 in cash and deposit the rest of the money in his savings account. What is the total deposit? (Currency + Coins + Checks) – Cash received ($ $ $47.51) $20.00 $ $20.00 = $187.09

5 We want to deposit $68 in bills, $10. 40 in coins, two checks for $29
We want to deposit $68 in bills, $10.40 in coins, two checks for $29.34 and $ Want to receive $50 in cash. How much is the deposit?

6 Section Withdrawals To withdraw is to take away. When you fill out a withdrawal slip, you’re taking money out of your bank account 6 withdrawals per month Once again, we must be able to write dollar amounts in word form

7 Refresher… Write $45.00 in word form Write $357 in word form
Write twenty-five and 50/100 dollars as a numeral Forty-five and 00/100 dollars Three hundred fifty-seven and 00/100 dollars $25.50

8 Section Withdrawal Dalton Rhodes would like to withdraw $45 from his savings account. His account number is How should he fill out the withdrawal slip?

9 Remember!!!!!!!!!!!!!!!!! With a deposit, you are GETTING money. We add deposits onto our existing balance With a withdrawal, you are TAKING money OUT of your account. We subtract withdrawals from our existing balance

10 Savings Accounts - Online
You can withdraw money from your savings at an ATM. You can also transfer money from checking to savings or vice versa using online/mobile banking

11 Why Savings? A study by Moebs Services showed that consumers were hit with $31.5 billion in overdraft fees by banks in 2011. Savings accounts can be used as an overdraft account

12 History of Bank Accounts
When people of Egypt and Greece wanted to deposit their gold and silver, they went to the temples. The temples practiced a simple form ccccccccccccccccccc of banking by then cccccccccccccccccc loaning gold and silver cc to others for a high cccc rate of interest.

13 Practice problems Pg. 198, #13-17 Pg. 200, #5, 16-20

14 Section 5.3 - Account Statements
With a savings account, your bank may mail you a monthly or quarterly account statement, which shows all deposits, withdrawals, and interest credited to your account

15 Account Statements The focus of this section is to compute the new balance on an account statement after a transaction has been made and/or interest has been credited New balance = Previous Balance + Interest + Deposits - Withdrawals

16 Example 1 Your savings account statement shows a previous balance of $1, and $2.10 in interest. You made deposits of $210.00, $50.00, and $ You had withdrawals of $50.00 and $ What is your new balance? $1, $ ($210 + $50 + $40) – ($50 + $75) =$1, new balance

17 Account Statements Interest is only entered on the account statement on a periodic basis, such as monthly or quarterly Remember, we ADD interest and deposits to our previous balance. We SUBTRACT withdrawals

18 Section 5.4 – Simple Interest
Whenever you borrow money, you pay a usage fee. That fee is called interest Interest = the amount charged for the use of borrowed money

19 Simple Interest The amount of interest you pay is based on three elements: The amount you borrow The interest rate The length of time the money is borrowed for

20 Simple Interest Principal: the amount borrowed
Interest Rate: annual percentage of the principal that is charged as a fee Term (Time): Length of time the money is borrowed

21 Simple Interest Interest = Principal x Rate x Time
(I = Prt) When it’s time to pay back money, you’re required to pay the principal plus the amount of interest that has accumulated. This is called simple interest and it is typically used for very short-term borrowing or investments

22 Simple Interest The formula to calculate what is paid back is:
Amount = Principal + Interest A = P + I

23 Example 1 If you borrow $1,000 for five years at an interest rate of 10%, the amount of interest you pay is: I = Prt I = $1,000(0.10)(5) I = $500

24 Example 1 (cont.) The total amount due at the end of five years is:
A = P + I A = $1,000 + $500 A = $1,500

25 When you borrow money, you pay interest but when you invest money, you earn interest. An investment is really a case where you lend your money to someone else and they pay you interest. The same equations apply when calculating simple interest that is earned except now the principal is the amount invested and interest is the amount earned

26 Example 2 If you put $5,000 in a savings account that pays 2% annual interest, the amount of money you will have at the end of the year is: I = PRT I = $5,000(0.02)(1 year) I = $100

27 Converting Time to Years
When using the interest formula, we always want to express time (t) in terms of years. For example, 6 months would be written as ½ years, or 0.5 years. Converting Months to Years = # 𝑜𝑓 𝑚𝑜𝑛𝑡ℎ𝑠 𝑜𝑓 𝑡ℎ𝑒 𝑙𝑜𝑎𝑛 12 𝑚𝑜𝑛𝑡ℎ𝑠 𝑖𝑛 𝑎 𝑦𝑒𝑎𝑟

28 Converting Time to Years
Henry Gale invested $600 in to an account with an interest rate of 5%. The interest was computed after 9 months. What was the total amount of interest earned? What is Henry’s new balance?

29 Converting Time to Years
Converting Days to Years # 𝑜𝑓 𝑑𝑎𝑦𝑠 𝑜𝑓 𝑡ℎ𝑒 𝑙𝑜𝑎𝑛 365 𝑑𝑎𝑦𝑠 𝑖𝑛 𝑎 𝑦𝑒𝑎𝑟

30 Converting Time to Years
John Lock lent $2,000 to his friend Benjamin Linus at 2% interest for 40 days. How much interest does Linus owe at the end of the loan? What is the total amount that Linus will pay back?

31 5.4 – Review…. Money is not free to borrow, so we pay a usage fee. This fee is known as interest.

32 5.4 Review… Alex wants to borrow $1,000 from the bank. The bank says “10% interest”. So to borrow $1,000 for a year would cost… 1000(.10)(1) = $100 Alex ends up paying an extra $100 (interest) to the bank for allowing him to borrow money

33 5.5 - Compound Interest Compound interest is interest earned not only on the original principal, but also on the interest earned during previous interest periods. Snowball effect

34 Different Ways to Compound…
When you compound annually, T = 1 because you are earning interest every 1 year When you compound semiannually, T = ½ because you are earning interest every 6 months, or you could say every ½ of a year

35 Different Ways to Compound…
When you compound quarterly, T = ¼ because you are earning interest every 3 months, or you could say every ¼ of a year When you compound monthly, T = 1/12 because you are earning interest every month, or you could say every 1/12 of a year

36 Example 1 $900 compounded quarterly at 6%. How much will be in the account in 6 months?

37 Example 2 $2,360 compounded semiannually at 4 1 2 %.
How much is in the account after 1 year?

38 Example 3 $27,721 compounded annually at 9.513%. How much is in the account in 3 years?

39 5.6 – Compound Interest Equation
To compute compound interest quickly, you can use a compound interest equation 𝐴=𝑃 (1+ 𝑟 𝑛 ) 𝑛𝑡 P = Principal r = Annual Rate n = # of compound periods per year t = # of years A = amount of $ in savings account after t-years

40 Compound Interest Equation
Once we know the total amount A, we can find Interest earned I = A – P

41 Example 1 6 percent interest, compounded quarterly. You deposited $3,000 for 2 years. How much interest is earned during the 2 years? P = $3,000 R = 0.06 N = 4 T = 2 𝐴=𝑃 (1+ 𝑟 𝑛 ) 𝑛𝑡 𝐴=3,000 ( ) 4(2) A = $3,379.48 So I = A – P, I = (3,379.48)-(3,000) = $ interest

42 Example 2 P = $4,379.47 r = 6% annual interest
compounded quarterly. How much $ in the account in 1½ years?

43 5.7 – Daily Compounding Usually, the more frequently interest is compounded, the more interest you will earn Many banks offer savings accounts with daily compounding Interest is computed each day and added to the account balance

44 5.7 – Daily Compounding When computing daily interest, we will continue to use our Compound Interest Equation

45 Example 1 Suppose you deposit $8,000 in an account that pays 5.5% interest compounded daily. How much interest will you earn in 31 days?

46 Section Annuities An annuity is an equal amount of money deposited into an account at equal periods of time Ordinary annuity occurs when equal deposits are made at the end of each interest period (such as salaries) Annuity due occurs when you have regular deposits at the beginning of the period (such as rent)

47 Annuities Both annuity groups use the future value
The amount of money in the annuity account at the end of a specific period of time Future value = Amount of Deposit x Future value of $1.00 Future Value of = Future value of an X ($ Rate An Annuity Due ordinary annuity per period)

48 Example 1 Deposit $500 in an ordinary annuity at the end of each quarter in an account earning 6% interest compounded quarterly. What’s the future value of the account in 2 years? Total number of periods: quarterly for 2 years = 8 periods Interest rate per period = Use the table on pg. 798 $500( ) = $4, future value

49 Example 2 $500 in an annuity due at the beginning of each quarter in account earning 6% interest compounded quarterly. What’s the future value in 2 years? From example 1, we know the future value of the ordinary annuity is $4,216.42 We also know that the rate per period is 1.5% Future value of Ordinary Annuity X ($ rate per period) $4, X ( ) = $4,279.67

50 PAGE 219, #5-15 TURN IT IN TO ME WHEN YOU FINISH, THEN GET THE HOMEWORK FROM ME!


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