CHAPTER 3, SECTION 1Savings Accounts

I CAN…

Calculate simple interest on savings deposits. Calculate compound interest on savings

deposits. Calculate interest using a compound interest

table.

SO WHY OPEN A SAVINGS ACCOUNT?

It keeps your money safe! You can earn more money putting it in the

bank than you can putting it in your piggy bank! This money is called “interest.”

Interest is money paid to an individual or institution for the privilege of using their money.

WHAT HAPPENS WHEN I DEPOSIT $ INTO A SAVINGS ACCOUNT?

When you deposit money or take money out (withdraw) of your savings you get a receipt.

A receipt is an official record of your “transaction.”

Banks use the money you put into your savings account to make loans to their customers.

HOW OFTEN DO BANKS PAY ME FOR MONEY IN MY SAVINGS ACCOUNTS?

It varies—some banks pay: Semiannually (twice a year) Quarterly (once every 4 months) Monthly (every month) Daily (every day)

HOW EXACTLY DO THEY FIGURE OUT WHAT TO PAY YOU? Most banks use “simple interest.” Interest = Principal x Rate x Time or I = PRT

Interest = how much money they are paying you. Principal = how much money you have in the bank Rate = the interest rate expressed as a decimal Time = how long

Time is always expressed as YEARS! So if the time is only 3 months, 6 months, etc., you have to figure out the fraction of the year.

3 months = 3/12 (total months in a year) or .25 years Ex. 1, Check your understand A & B P. 85, 7-10

HOW ELSE CAN INTEREST BE CALCULATED OTHER THAN “SIMPLE” ?

Banks can pay you “compound interest.” Compound interest is when banks pay you

interest on the money in your account (the principal) AND the money you earned from simple interest for the next period.

This is called “compounding interest.”

SO WHAT’S THE TOTAL MONEY IN SAVINGS CALLED?

The total money in your savings account at the end of the last interest period is called the “compound amount,” assuming that no deposits/withdrawals have been made.

The total interest earned, called the “compound interest” is difference between the original principal and the compound amount.

Total interest earned= Original principal-compound amount

LET’S PRACTICE!

P. 82, Example 2 Check your understanding C & D

HOW DO YOU CALCULATE COMPOUND INTEREST OVER SEVERAL PAY PERIODS?

There’s a table for that! (p.82) The table shows the value of $1 dollar after it

is compounded for various interest rates and periods.

To use the table Find the interest rate per period and the total

number of interest periods. The number in the table that corresponds to the

interest rate (column) and the number of periods (row) is the compound interest multiplier.

Use the multiplier to calculate interest. If interest is compounded DAILY there is a

separate chart for that! (p.83)

LET’S PRACTICE!

P. 83, example 3 Check your understanding E & F P. 84, example 4 Check your understanding G & H P. 85, 11-22