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10.1 Passbook Savings Account Why do people open savings accounts?  Keep their money safe  Earn interest on their money! Interest: money paid by the.

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Presentation on theme: "10.1 Passbook Savings Account Why do people open savings accounts?  Keep their money safe  Earn interest on their money! Interest: money paid by the."— Presentation transcript:

1 10.1 Passbook Savings Account Why do people open savings accounts?  Keep their money safe  Earn interest on their money! Interest: money paid by the bank for using somebody else’s money

2 SIMPLE INTEREST I= principal x rate x time I = prt time: semiannual=2x a year = ½ quarterly = 4x a year = ¼ Ex. If interest is paid at the rate of 6% a year, what is the interest on $270 for 1 quarterly period? I = (270)(.06)(1/4) = $4.05

3 COMPOUNDING INTEREST  add interest to the principal to make a new principal  For quarterly, interest is paid on Jan 2, Apr 1, Jul 1 and Oct 1 Ex. Principal = $1,000 Rate = 5% Compounded: quarterly Find total interest for 1 year.

4 Effective Rate of Interest: Amount of interest for 1 year Amount of money on deposit

5 10.2 Special Savings Accounts  Banks pay a higher rate of interest on these special accounts Why?? The banks keep the customers’ money on deposit for a specific period of time without making any withdrawals. 2 Types: 1. Time deposit: aka certificate of deposit 2. Money market account

6 Time deposit aka certificate of deposit (CD’s) Requirements:  Minimum deposit amount  Leave $ on deposit for a minimum time (term). The end of the term is called maturity date. What happens if funds are withdrawn before maturity? PAY PENALTY!

7 Money market accounts  Interest paid is fixed for short periods of time.  Withdrawals can be made as long as minimum is maintained.

8 Ex. Harry invested $3,000 in a 1-year term CD that paid interest of 8% a year. If he withdrew $500 before the term ended, what was the amount of the penalty if penalty was 6 months worth of interest? 6 months = ½ year Penalty = $500(0.08)(.5) = $20 If his account has already earned interest of $140, what is the amount of net interest earned? $140 – 20 = $120

9 10.3 Promissory Notes  A written promise to pay  A note that requires you to pay interest is an interest-bearing note: Face= principal = amount borrowed Date of note = when it is signed Maturity date = date $ must be repaid I = prt http://static.howstuffworks.com/pdf/samp-promissory.doc

10 Ex. Frank borrowed $3,000 from the bank. The rate of interest that he must pay is 7%. How much interest does he pay at the end of 2 years? I=(3,000)(.07)(2) = $420 How much is due at maturity? $3,000 + 420 = $3,420

11 Exact interest and banker’s interest (use when time is given in days) Exact interest: uses a 365-day year Banker’s interest: uses a 360-day year Ex. Find exact and banker’s interest: The loan is for $1,000 at 6% for 95 days. EXACT: $1,000(0.06)(95/365) = $15.62 BANKER: $1,000(0.06)(95/360) = $15.83

12 Rate of interest = interest for 1 whole year ÷ principal Ex. Ella paid $30 interest on a loan of $1,000 for 3 months. Find the rate of interest that she paid. 12 months in 1 year, so 12÷3 months = 4 $30 (4) = $120 Rate = $120/$1,000 = 0.12 = 12%

13 Discounted notes = interest is paid in advance aka noninterest-bearing note Rate of discount ≈ rate of interest I=prt Proceeds = Face amount – interest Real rate of interest = interest for 1 year proceeds

14 Ex The bank discounted a $2,500 note for Sam at 9% interest for 3 months. Find the proceeds of the note. I = prt = (2,500)(.09)(3/12) = $56.25 Proceeds = $2,500 – 56.25 = $2,433.75 Find the real rate of interest. Interest for 1 year = $56.25(4) = $225 Rate = $225 ÷ $2,433.75 = 0.092 = 9.2%

15 10.4 Interest and Date Tables Use table on page 371 Interest is for EVERY $100!!! Ex1: Find the interest on $570 for 15 days at 11.5% 570/100 = 5.7 5.7(0.4726) = $2.69 = interest! Ex2. Find interest on $2,500 for 45 days at 9% 2,500/100 = 25 (0.3699)*3=1.1097*25=$27.74 or 0.3699+0.7397=1.1096*25=$27.74

16 DUE DATES Find the maturity date of a note! Remember! February = 28 days (leap=29) Sept, April, June, Nov = 30 days All the rest = 31 days Finding due date when time is in MONTHS April 21 – 2 months – DUE: June 21 Dec 22 – 3 months – DUE: Mar 22 June 15 – 6 months – DUE??? January 31 – 1 month – DUE???

17 Finding due date when time is in DAYS Count the days in between! Ex.1 Find the maturity date of a 90-day note dated June 6. 90 June: -24(days left) 66 July: -31 (total days) 35 August: -31(total days) 4 Maturity date = Sept. 4!

18 10.5 Installment Buying Installment plan = paying for money owed in parts Downpayment = part of price paid at once Finance charge = added to purchase price; cost of doing business Finance charge = installment price – cash price

19 Ex1. The installment price of a CD player is $400. You must pay $40 down and make payments for 20 months. What will be your monthly payments? $400 – 40 = $360 $360 ÷ 20 = $18/ month Ex2. A camera has a cash price of $1,300. You pay $130 down and $75/month for 18 months. Find the finance charge. $75(18) = $1,350 + 130 = $1,480 $1,480 – 1,300 = $180 finance charge!

20 By what % is the installment price greater than the cash price? $180÷ 1,300 = 0.13846 = 13.8% Installment loan = interest is added to unpaid balances. Collateral=deposit or property as security for a loan; examples are cars, stocks, bonds, and life insurance. Annual percentage rate (APR) = shows the ratio of the finance charges to the amount financed or borrowed.

21 Your loan is for $250 repaid in 5 monthly payments. Finance charge 1% on unpaid balance. Month Unpaid balance Finance charge Principal Total payment 1$250$50 2 3 4 5

22 10-6 Credit Cards Credit cards can be used for the purchase of merchandise or services instead of cash or checks. What are advantages/disadvantages to using a credit card? Sample statement

23 Providing credit service costs stores/services money! Ex. Tattoo, Inc. accepts Citibank credit cards. Tattoo, Inc. had total credit sales of $5,400. Citibank charges 3% of sales for its services? a.How much did Tattoo, Inc pay the credit card company? $5,400(0.03) = $162 b.Find Tattoo, Inc. net receipts. $5,400 – 162 = $5238

24 10-6 cont’d… When using a credit card: Ideally, you would want to pay your credit card balance in full. If you don’t, interest is charged. Credit card companies allow you to use cash advance slips or ATM withdrawals. Interest is charged at a DAILY interest rate. Some credit cards charge an annual fee.

25 Ex. Midwest Card charges a $22 annual fee and a finance charge of 1.3% a month on all unpaid balances. In May, Midwest charged you the membership fee and a finance charge on your $450 unpaid balance. What was the balance on your May statement? Finance charge = $450 x 0.013= $5.85 $450 + 5.85 + 22 =$477.85 balance

26 Ex. Dee borrowed $600 on a cash advance for 30 days on her credit card. The finance charge rate was 0.0635% per day. What total finance charge did she pay? 0.0635% = 0.000635.000635 x 30 x 600 = $11.43 finance charge


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