GOALS

Lesson 3.6 Slide 1BUSINESS MATH © Thomson/South-Western

3.6 Savings Accounts

Calculate simple interest on savings deposits

Calculate compound interest on savings deposits

Calculate interest using a compound interest table

Lesson 3.6 Slide 2BUSINESS MATH © Thomson/South-Western

Interest

One reason people open savings accounts is to keep their money safe.

Another reason is that they earn interest on their money.

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

Lesson 3.6 Slide 3BUSINESS MATH © Thomson/South-Western

Transaction

As with a checking account, you may deposit money into or withdraw money from your savings account.

The bank teller may give you a receipt, which is an official record of the transaction.

A transaction is something that happens that has to be recorded, such as a deposit or withdrawal.

Lesson 3.6 Slide 4BUSINESS MATH © Thomson/South-Western

Simple Interest

Simple interest is often figured quarterly, or four times a year, on the balance of the account at the end of each quarter.

The interest is paid on the first day of the next quarter, or on January 1, April 1, July 1, and October 1.

Sometimes interest is paid twice a year, or in semiannual periods (six months, or one-half year).

Lesson 3.6 Slide 5BUSINESS MATH © Thomson/South-Western

Calculate Simple Interest

To find the simple interest for any period, first find the interest on the deposit for a full year.

Then multiply that amount by the fraction of a year, such as ¼ or ½ for which you want to find interest.

Interest = Principal × Rate × Time (I=PRT)

Lesson 3.6 Slide 6BUSINESS MATH © Thomson/South-Western

Compounding Interest

At the end of each interest period, the interest due is calculated and added to the previous balance in the savings account.

The new balance then becomes the principal on which interest is calculated for the next period, if no deposits or withdrawals are made.

When you calculate interest and add it to the old principal to make a new principal on which you calculate interest for the next period, you are compounding interest.

Lesson 3.6 Slide 7BUSINESS MATH © Thomson/South-Western

Compound Interest

Regardless of how interest is earned, the total money in the savings account at the end of the last interest period is called the compound amount, assuming that no deposits or withdrawals have been made.

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

Lesson 3.6 Slide 8BUSINESS MATH © Thomson/South-Western

Compound Interest Tables

When you calculate compound interest for several interest periods, you can use a compound interest table.

The table shows the value of one dollar ($1) after it is compounded for various interest rates and periods.

Lesson 3.6 Slide 9BUSINESS MATH © Thomson/South-Western

Sample Compound Interest Table

Lesson 3.6 Slide 10BUSINESS MATH © Thomson/South-Western

Using a Compound Interest Table

To calculate annual interest, locate the column and row where the interest rate and the number of interest periods meet.

The number you find is called the multiplier. Multiply the deposit amount by the multiplier

to find the compound amount. Subtract the original principal from the

compound amount to find compound interest.