1. CH. 5.2 INTEREST-BEARING ACCOUNTS Banking Services

2. Interest can Work for You or Against You  You can be paid interest on your deposits  You will have to pay interest on money you borrow  Interest is usually expressed as a rate or percentage of the total amount of money in use  It is calculated over time

3. Interest  The price paid for the use of money  The bank is using your money when you deposit funds (sometimes the bank will pay you for it)  When you use the bank’s money, you pay them

4. Calculating “Simple” Interest P x R x T = I  P – Principal  R – Rate  T – Time (expressed in years or portions of years as a decimal value) ex) 6 months = 0.5 years  I - Interest

5. Example on page 131

6. Practice Problem  Calculate the simple interest on a savings account in 6 months that begins with a deposit of $1,500 & pays 2 ¾ percent interest. P x R x T = I $1,500 x.0275 x 0.5 = $20.63

7. When interest is calculated matters  Interest is paid on some fixed interval  Annually (once a year)  Semiannually (every 6 months)  Quarterly (every 3 months)  Any interval they want  The more frequently it is calculated, the more interest you earn (or pay) over the course of time

8. Compound Interest  The process of adding interest to the principal & paying interest on the new total  It is the most powerful savings tool!

9. Compound Interest  Compound interest “starts over” with a new principal every time interest is paid, adding the paid interest to create a higher principal on which interest is paid in the next interval

10. Simple Interest vs. Compound Interest  If you invest $10,000 for 3 years at a simple interest rate of 5% per year, you would make $500 in interest each of the 3 years, for a total of $1500 in interest. P x R x T = I $10,000 x.05 x 3 = $1,500 You would end up with: $10,000 + $1,500 = $11,500

11. Simple Interest vs. Compound Interest  If you invested that $10,000 for 3 years and earned 5% interest compounded semi- annually, you would have earned:  $1,597.10 in interest  Total of $11,597.10  See chart on page 132

12. Formula for Calculating Compound Interest F = P(1 + R) n F = Future Value P = Principal R = Rate n = number of intervals

13. To Get the Most out of Compound Interest  Larger principals & longer terms have a dramatic effect on compounding interest  Making regular additions to the principal also has a dramatic effect  Ex) if you put $20 a week in a savings account earning 5% interest compounded annually, at the end of 5 years, you would deposited $5,200 but your balance would be $6,033.99

14. Annual Percentage Rate (APR)  the nominal rate on which interest is calculated per year. Ex) 5% APR

15. Annual Percentage Yield (APY)  Percentage that represents the effect of compounding  Ex) the APR may be 5%, but when it’s compounded annually, the APY is 5.3%  APR varies according to the APR & the frequency of compounding

16. “Rate Chasers”  Consumers who are perpetually moving their funds among various accounts to obtain the highest interest available at any point in time  They enter into banking relationships to make a quick profit.  They do not intend to become long-term customers of the bank.  (Banks don’t really like them)

17. Dave Ramsey Video on Compounding Interest