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Chapter 5

Chapter 5 . Section 5.2. Types of Accounts in a Bank. Certificate of Deposit Money Market Accounts U.S. Savings Bonds. Certificate of Deposit. Is often referred as a CD (not the music kind). Some info about CD’s Term – length a CD Principal – the original amount you put in.

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Chapter 5

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  1. Chapter 5 Section 5.2

  2. Types of Accounts in a Bank • Certificate of Deposit • Money Market Accounts • U.S. Savings Bonds

  3. Certificate of Deposit • Is often referred as a CD (not the music kind). • Some info about CD’s • Term – length a CD • Principal – the original amount you put in. • Maturity Date – when you can take the money out without penalty.

  4. Three limitations for CD’s • Must leave money in bank for at least 3 months, but can be for 3 to 5 years. • Large penalty for taking money out early. • There is always a minimum amount that you must put in depending on the length of the CD.

  5. Money Market Accounts • Requires a minimum balance and earns interest that varies from month to month. • Usually requires a larger initial investment than a regular checking or savings account. • Penalty if the your balance goes below the minimum required balance. • Can write a certain amount of checks.

  6. U.S. Savings Bonds • Also know as…. Patriot Bonds • Were bought during the war to help support the government support the troops when we were at war. • Downside – Usually takes a long time to generate any interest from the bond. Also bonds purchased after 1997 incur a three month penalty if cashed before maturity date.

  7. Savings Plans and Payment Methods

  8. Rate of Return • Rate of Return • Is the percentage increase in the savings from earned interest. • Here is an example: • Sally put her $75 in a savings account that earned $3 at the end of the year. How much was her rate of return. • ($3.00/$75.00 = .04 or 4%) • She had a 4% return on her investment. • Look at worksheet

  9. Compounding Interest • Compounding means that we calculate interest for the account add that amount to the account and then recalculate it again with the new amount the next month.

  10. The loooooong way to do compound interest Mr. Prosser put $100 in his savings account that accumulated 4% interest that was compounded yearly. At the end of 5 years he compounded a total of 121.67

  11. Now you do one…. • Principal $250 • Interest 2.5% • 4 Years 250.00 250*.025 = 6.25 256.25 6.41 262.66 256.25 6.57 269.23 262.66 6.73 275.96 269.23

  12. Lets do another…. Sally puts 200 in the bank and it will be compounded monthly at 3%. How much do you have in your account after 5 years? M=P(1+i)n

  13. Annual Percentage Yield (APY) • Is the amount of interest that a $100 deposit would earn, after compounding, for one year. • Easier definition – It is the amount of interest that you would accumulate on the account if you did not deposit or withdrawal anything from this account. • So if you deposited 100 dollars and got 105 dollars at the end of the first year the APY would be 5%

  14. The Rule of 72The most important and simple rule to financial success.

  15. Rule of 72 • The answers can be easily discovered by knowing the Rule of 72 • The time it will take an investment (or debt) to double in value at a given interest rate using compounding interest.

  16. Albert Einstein Credited for discovering the mathematical equation for compounding interest, thus the “Rule of 72” T=P(I+I/N)YN “It is the greatest mathematical discovery of all time.”

  17. What the “Rule of 72” can determine • How many years it will take an investment to double at a given interest rate using compounding interest. • How long it will take debt to double if no payments are made. • The interest rate an investment must earn to double within a specific time period. • How many times money (or debt) will double in a specific time period.

  18. Things to Know about the “Rule of 72” The “Rule of 72” • Is only an approximation • The interest rate must remain constant • The equation does not allow for additional payments to be made to the original amount • Interest earned is reinvested • Tax deductions are not included within the equation

  19. Doug’s Certificate of Deposit • Invested $2,500 • Interest Rate is 6.5% Doug invested $2,500 into a Certificate of Deposit earning a 6.5% interest rate. How long will it take Doug’s investment to double?

  20. Another Example The average stock market return since 1926 has been 11% Therefore, every 6.5 years an individual’s investment in the stock market has doubled

  21. Jessica’s Credit Card Debt • $2,200 balance on credit card • 18% interest rate Jessica has a $2,200 balance on her credit card with an 18% interest rate. If Jessica chooses to not make any payments and does not receive late charges, how long will it take for her balance to double?

  22. Another Example • $6,000 balance on credit card • 22% interest rate

  23. Jacob’s Car • $5,000 to invest • Wants investment to double in 4 years Jacob currently has $5,000 to invest in a car after graduation in 4 years. What interest rate is required for him to double his investment?

  24. Another Example • $3,000 to invest • Wants investment to double in 10 years

  25. Rhonda’s Treasury Note Rhonda is 22 years old and would like to invest $2,500 into a U.S. Treasury Note earning 7.5% interest. How many times will Rhonda’s investment double before she withdraws it at age 70?

  26. Another Example • $500 invested at age 18 • 7% interest • How many times will investment double before age 65?

  27. Conclusion continued • Things individuals must remember about the Rule of 72 include: • Is only an approximation • The interest rate must remain constant • The equation does not allow for additional payments to be made to the original amount • Interest earned is reinvested • Tax deductions are not included within the equation

  28. Types of Checking Accounts • Three main categories: • Regular • Active • Interest-Earning (Bearing)

  29. Checking accounts • Regular Checking Accounts • Non- Interest bearing • No minimum required balance • Usually no extra fees • Activity Accounts • Used if you write very few checks from this account and unable to stay above the minimum balance. • Fee for each check you write and sometimes a fee for each deposit you put into the bank. • Also a monthly service fee for this account.

  30. Interest-Earning (Bearing) Accounts • A combination between checking and savings accounts. • These accounts pay interest if you maintain a minimum balance. • If you drop below minimum – fees are charged.

  31. Evaluating Checking Accounts • What should I look for when getting a checking account? • Restrictions • Minimum balance • Number of checks or deposits • Fees and Charges • Service charge for • Check printing • Overdrafts • Stop-payments

  32. Interest • Interest Rates • Frequency of compounding • The way interest is calculated all affect interest bearing checking accounts • Special Services • Overdraft protection

  33. Comparing checking accounts worksheet

  34. Using a Checking Account • Opening a checking account • Signature Card • Individual or Joint Accounts • Individual • Your name is the only name on the account • Only one that can write checks and make deposits • Joint Accounts • Also called a “or” account • Two names on an account, either name can make deposits or withdrawals on the account

  35. Go to other powerpoint

  36. Printed name and Address of depositor Writing a checks Check No. Date of the Check Name of the Person you are writing the check to. Amount for the Check Amount in Words Name of Bank checks were issued from. Why the check was written Signature Line Routing Number Account Number

  37. Check Register • The check register is the where we keep track of all of the checks we have written. • No days there are carbon copies, and electronic displays of checks.

  38. Example of a Check Register

  39. Writing the number • When you write a number it has to be written out fully…. • For example: $125.56 • One hundred twenty-five and 56/100 • Practice these • $1234.56 One thousand two hundred thirty-four and 56/100 • $34.76 Thirty-four and 76/100

  40. Lets write a few checks • Mr. Prosser decides to pay his bills on Saturday. • Here are the bills he needs to pay • Gas Bill $79.25 (Laclede Gas) • Car Payment $1,111.00 (GMAC) • Computer Repair –Circuit City $325.00 • Birthday gift from Grandpa $50

  41. Making Deposits • Deposit Slip – • A formal bank document declaring that you wish to put money into a bank.

  42. Making Deposits • Deposit Slip – • A formal bank document declaring that you wish to put money into a bank. • Comprises of lines that have checks and cash. • When depositing checks 3 ways to sign a check • Blank Endorsement • Restrictive Endorsement • Special Endorsement

  43. Blank endorsement • Easiest of endorsement – just sign the back of the check. • Easiest to steal, loose the check someone else can sign underneath and cash your check. • Restrictive Endorsement • Check holders signature and how the check should be used. “For Deposit ONLY”

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