Chapter 3, section 5 Money Market & CD Accounts

I can…  Calculate interest earned on special savings accounts  Calculate the penalty for early withdrawals from CD accounts.  Compare the interest earned on savings accounts.  Calculate the effective rate of interest.

Where else can I invest my money?  For long-term savings OR for those with LOTS of money in the bank, banks offer “special savings accounts.”  CD’s or money market accounts are two well known “special savings accounts.”

What’s a CD?  No, we’re not talking about a music CD!  When it comes to money, a CD is a certificate of deposit (a special savings account).  CD’s pay higher interest rates than a typical savings account. In return for the higher interest paid, banks require CD holders to:  Deposit a minimum amount ($500, $1000, $5000, or $10,000)  Leave the money in for a specified amount of time (days, months, years). The time required is called the term. The date that the money can be taken out is called the maturity date.  Pay a penalty if you withdrawal your money before the maturity date.

What’s a money market account?  They also offer higher interest rates than regular savings accounts. Special rules also apply to money market accounts.  A minimum balance must be kept in your account. More money can be added to your account at any time.  The interest rate changes based on the economy.  A small number of checks may be written on the account.

So how is interest calculated on a CD?  You calculate interest using the simple interest formula from Ch. 2: I=PRT  Example 1, p. 110  Check you understanding A & B

How much do banks charge for taking your money out of a CD before it’s maturity date?  Each bank sets its own penalty for early withdrawals. The penalty varies depending on the term of the CD.  For example, a 1 year CD may carry a penalty of 3 months’ interest.  Example 2, p  Check your understanding C & D.

How do I know which savings account will earn more money?  You should compare them based on the amount of interest earned.  Example 3, p. 111  Check your understanding E & F

What’s the “effective rate of interest?”  The “effective rate of interest” is the rate you actually earn by keeping your money on deposit for one year.  This rate and the annual rate can be different. The effective rate is the more accurate of the two and is sometimes referred to as the annual percentage yield.” Effective Rate of Interest= Interest Earned in 1 yr Principal  Example 4, p. 112  Check your understanding G & H