Financial Algebra 2 April 2018

announcements This week is PERT testing (Wednesday/Thursday) It shouldn’t affect you unless you need to take the PERT, or I have to give it at the start of the day Please remember: the first quiz of the quarter is due by April 5th If you’ve lost your copy, or need another copy please see me tomorrow Tomorrow is the last day to pick up a copy

agenda At the very least, I want to cover 10 minutes of the next section – Savings After that 10 minutes, you can work on your quiz if you’d like

Some of the Vocabulary for this section 401(k)/403(a) plans Annuity Certificate of deposit (CDs) Interest Compound interest Annuity/fixed annuity Individual retirement account (IRA) Traditional IRA Roth IRA SEP-IRA Money market deposit account Pension plan Vesting

Last class We covered the basics of Savings accounts How they are assets with significant liquidity They still have less liquidity than a Checking account because you are not able to write checks from them But they are liquid enough for you to withdraw and move money from them at whatever time is convenient So here’s a question: What happens when you are not allowed to move your Savings as often as you’d like? Well, then you have a certificate of deposit (CD)

Certificates of deposit (CDs) Certificates of Deposit (CDs): “An agreement” in contract form between an individual and the financial institution that specifies some length of time that the individual will leave a certain amount of money deposited at the particular bank Now these agreements have certain requirements: Minimum amount to be held in the CD (lowest I found: $1,000) The interest rate of the CD The maturity date and final amount that will result from the CD Maturity time periods can vary (3 months, 6 months, 1 year, 3 years, 5 years are most common) So, what’s the point? These give higher rates of interest than Savings (maximum found: 2.5%)

Certificates of deposit (CDs) But there is a catch… You can access the money before the maturity date is up… You have to pay a penalty for taking money out early, sometimes up to a percentage of what was deposited Consider CDs only when you know that you will not need the money until after the CD matures

Real-world problem Brooke bought a one year $5,000 CD that pays 4 percent interest annually. How much will she have at the end of the year (assuming all the interest earned is added at year’s end)? Answer: $5,000 x 1.04 = $5,200 Question: How much money would she have at the end of 3 years? Answer: $5,000 x 1.04 = $5,200 (Year #1) Answer: $5,200 x 1.04 = $5,408 (Year #2) Answer: $5,408 x 1.04 = $5,624.32 (Year #3)