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

SIMPLE INTERESTI= principal x rate x timeI = p•r•t

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

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 1Ex.Principal = $1,000Rate = 5%Compounded: quarterlyFind total interest for 1 year.

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

10.2 Special Savings Accounts Banks pay a higher rate of interest on

these special accountsWhy??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

deposit2. Money market account

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What happens if funds are withdrawn before maturity?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!

Money market accounts

Interest paid is fixed for short periods of

time. Withdrawals can be made as long as

minimum is maintained.

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

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 borrowedDate of note = when it is signedMaturity date = date $ must be

repaid

I = prt

http://static.howstuffworks.com/pdf/samp-promissory.doc

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) = $420How much is due at maturity?

$3,000 + 420 = $3,420

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) = $15.62BANKER: $1,000(0.06)(95/360) = $15.83

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) = $120Rate = $120/$1,000 = 0.12 = 12%

Discounted notes = interest is paid in advance

aka noninterest-bearing note

Rate of discount ≈ rate of interestI=prt

Proceeds = Face amount – interestReal rate of interest = interest for 1 year proceeds

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) = $56.25Proceeds = $2,500 – 56.25 = $2,433.75

Find the real rate of interest.Interest for 1 year = $56.25(4) = $225Rate = $225 ÷ $2,433.75 = 0.092 = 9.2%

10.4 Interest and Date Tables

Use table on page 371Interest 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=$27.74or 0.3699+0.7397=1.1096*25=$27.74

DUE DATESFind the maturity date of a note!Remember! February = 28 days (leap=29)Sept, April, June, Nov = 30 daysAll the rest = 31 days

Finding due date when time is in MONTHSApril 21 – 2 months – DUE: June 21Dec 22 – 3 months – DUE: Mar 22June 15 – 6 months – DUE???January 31 – 1 month – DUE???

Finding due date when time is in DAYSCount 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!

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 – cashprice

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!

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.

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

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

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

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.

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

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