certificates of deposit pp. 394-396 12-1 section
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Certificates of Deposit pp. 394-39612-1SECTIONSECTION
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Section ObjectiveSection ObjectiveUse tables to compute:
• interest on certificates of deposit
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certificate of deposit (p. 394)
A kind of savings account that requires a specific deposit for a specified period of time, and which earns a higher rate of interest than a regular savings account.
Key Words to KnowKey Words to Know
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Amount = Original Principal × Amount per $1.00
Formula 1Formula 1
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Interest Earned = Amount – Original Principal
Formula 2Formula 2
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Life after Working Shifts p. 394Life after Working Shifts p. 394
If you want to find the best rate for a CD, is it best to consult only your neighborhood bank?
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Paul Crates invests $4,000 in a 1-year certificate of deposit that earns interest at an annual rate of 5 percent compounded monthly.
How much interest will he earn at the end of 1 year?
(Refer to the Amount of $1.00 Invested—Daily, Monthly, and Quarterly Compounding table on page 800 of your textbook.)
Example 1Example 1
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Find the amount.
Original Principal × Amount per $1.00
$4,000 × 1.051162 = $4,204.648 or $4,204.65
Example 1 Answer: Example 1 Answer: Step 1Step 1
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Find the interest earned.
Amount – Original Principal
$4,204.65 – $4,000.00 = $204.65
Example 1 Answer: Example 1 Answer: Step 2Step 2
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Ching-Hsia Chan can invest $5,000 in a 1-year CD at 4 percent compounded monthly or a 1-year CD compounded daily.
What is the difference earned in each investment?
Example 2Example 2
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Find the interest earned in each investment.
Monthly: $5,000 × 1.040742 = $5,203.71
$5,203.71 – $5,000 = $203.71
Daily: $5,000 × 1.040808 = $5,204.04
$5,204.04 – $5,000 = $204.04
Example 2 Answer: Example 2 Answer: Step 1Step 1
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Find the difference earned in each investment.
Difference: $204.04 – $203.71 = $0.33
Example 2 Answer: Example 2 Answer: Step 2Step 2
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Refer to the Amount of $1.00 Invested—Daily, Monthly, and Quarterly Compounding table on page 800 of your textbook.
$25,000 at 7.75 percent for 1 year compounded daily or 1 year compounded monthly.
Find the difference in the amount of interest for each investment.
Practice 1Practice 1
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$6.50
Practice 1 AnswerPractice 1 Answer
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Refer to the Amount of $1.00 Invested—Daily, Monthly, and Quarterly Compounding table on page 800 of your textbook.
$4,500 invested at 8.75 percent for 4 years compounded daily or 9 percent for 4 years compounded quarterly.
What is the amount of each CD at maturity?
Which CD earns the most interest? By how much?
Practice 2Practice 2
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8.75% compounded daily is worth $6,385.54
9% compounded quarterly is worth $6,424.29
9% compounded quarterly earns $38.75 more than 8.75% compounded daily
Practice 2 AnswerPractice 2 Answer
Certificates of Deposit12-1END OF SECTIONEND OF SECTION