1. 3.7 MONEY MARKET AND CD ACCOUNTS
MRS. RUIZ-EMMONS
Business math
FALL 2018

2. GOALS CALCULATE INTEREST EARNED ON SPECIALS SAVINGS ACCOUNTS
CALCULATE THE PENALTY FOR EARLT WITHDRAWLS FORM CD ACCOUNTS
CALCULATE THE EFFECTIVE RATE OF INTEREST

3. SPECIAL SAVINGS ACCOUNTS
MOST BANKS OFFER SPECIAL SAVINGS ACCOUNTS. THE INTEREST RATES PAID ON THESE SPECIAL ACCOUNTS ARE HIGHER THAN RATES ON REGULAR SAVINGS ACCOUNTS.
CERTIFICATE OF DEPOSIT- THE CERTIFICATE OF DEPOSIT IS WIDELY REFERRED TO AS A CD. THE CD IS ALSO KNOWN AS A TIME DEPOSIT OR SAVINGS CERTIFICATE.
SOME GOVERNMENT RULES APPLY TO CERTIFICATE OF DEPOSIT ACCCOUNTS.

4. COMMON REQUIREMENTS FOR CDs
DEPOSIT A MINIMUM AMOUNT. THIS MAY BE $500, $1000, 5000 ETC.
LEAVE THE MONEY ON DEPOSIT FOR A MINIMUM TIME. THE TIME MAY BE SPECIFIED IN NUMBER OF DAYS, MONTHS OR YEARS.
THE MINIMUM TIME IS CALL THE TERM. THE DATE THAT MARKS THE END OF THE TERM IS THE MATURITY DATE.
PAY A PENALTY IF MONEY IS WITHDRAWN BEFORE THE END OF THE TERM.

5. MONEY MARKET ACCOUNTS
MONEY MARKET ACCOUNTS OFFER A HIGHER INTEREST RATES THAN REGULAR ACCOUNTS. SPECIAL RULES APPLY :
A MINIMUM BALANCE MUST BE KEPT IN THE ACCOUNT FOR THE TERM SPECIFIED. MORE MONEY MAY BE ADDED TO THE ACCOUNT AT ANY TIME.
THE INTEREST RATE PAID IS FIXED FOR SHORT PERIODS OF TIME
A SMALL NUMBER OF CHECKS MAY BE WRITTEN AGAINST THE ACCOUNT

6. RULES
MONEY CAN BE WITHDRAWN AS LONG AS THE MINIMUM BALANCE IS MAINTAINED.
IN BOTH CERTIFICATES OF DEPOSITS AND
MONEY MARKETING ACCOUNTS, INTEREST
DOES NOT HAVE TO BE COMPOUNDED.
SOME BANKS PAY SIMPLE INTEREST AT THE END OF THE TERM.
THE INTEREST RATE USUALLY CHANGES
AT THE END OF THE TERM.

7. EXAMPLE PAGE 119
NICK KEPT $1,200 ON DEPOSIT FOR SIX MONTHS IN A THREE-MONTH MONEY MARKET ACCOUNT THAT PAYS SIMPLE INTEREST. FOR THE FIRST 3 MONTHS, THE ACCOUNT PAID 2.5% ANNUAL INTEREST. FOR THE NEXT 3 MONTHS, AN ANNUAL INTEREST RATE OF 2.15% WAS PAID. WHAT TOTAL INTEREST DID NICK EARN FOR THE SIX MONTHS?

8. SOLUTION
Multiply the principal by the interest rate and by the time to find interest for the first 3-month term.
$1,200 x x 3/12= $7.50 (interest for first 3-months)
Multiply the principal by the interest rate and by the time to find interest for the second 3-month term.
$1,200 x x 3/12 = $6.45 (interest for second 3-month period)
Add the interest earned for each 3-month term.
$ $6.45-= $13.95 total interest earned for six months

9. Check your Understanding pg. 119
A. Rose Bannon Deposited $10,000 in a three- year certificate of deposit that pays simple interest at a fixed amount rate of 5.4%. What total interest will Rose have earned at the end of three years?

10. Solution
A. $10,000 X X 3 = $1,620

11. B. Alex Nugent had $2,000 on deposit for March and April in a one-month money market account. Interest in the account is not compounded. In March, the account paid 1.4% annual interest. In April, an annual interest rate of 1.32% was paid. What total interest did Alex earn for the two months?

12. Solution $2,000 x 0.014 x 1/12 = $2.333 or $2.33 March
$2,000 X X 1/12 = $2.20 April interest: $ $2.20 = $4.53 total interest

13. Penalties on Certificates of Deposits pg. 120
By law, banks must charge depositors a penalty for withdrawing money early from a certificate of deposit.
Each bank sets its own penalty for early withdrawals.
The penalty is calculated on the money withdrawn from the certificate of deposit account before the end of its terms.

14. Example pg. 120
Ella Trane invested $5,000 in a 4-year CD that paid 5.2% annual interest. When she withdrew $800 at the end of 3 years, her early withdraw penalty was 6 months’ interest. What was the amount of the penalty and what was Ella’s net withdrawal?

15. Solution
Multiply the amount withdrawn by the interest rate and by the penalty time period of the early withdrawal.
$800 x x 6/12 = $ Six’s month interest penalty
Find the difference between the withdrawal amount and the interest penalty.
$800 - $20.80 = $ Net withdrawal amount

16. Compare Savings Accounts
Savings accounts are often compared by the interest earned in each account.
To compare, calculate the interest that would be earned by each type of account for the same period of time.

17. Check your understanding pg. 121
E. A six-month time deposit account pays 2.35% simple interest. Dora has already calculated that she could earn $15.13 in six months on a $1,400 deposit in a passbook savings account earning 2.15% daily interest. How much more interest could Dora earn if she deposited the $1,400 in the time deposit account instead of a savings account for 6 months?

18. Solution
$1,400 X X ½ = $16.45
$ $15.13 = $1.32

19. Effective Rate of Interest
The effective rate of interest is the rate you actually earn by keeping your money on deposit for one year. The annual rate and the effective rate you earn can be different. The effective rate you can earn can be different.
The effective rate is sometimes referred to as the annual percentage yield

20. Formula for rate of interest
Amount of Interest Earned for One Year
= Effective Rate of Interest
Amount of Money on Deposit

21. Check your Understanding pg. 122
G. A deposit of $2,000 is kept in an account that pays 4% annual interest, compounded quarterly. Find the effective rate of interest to the nearest hundredth percent if the money is on deposit for 1 year. Use the compound interest table (pg. 113)

22. Solution
x $2,000 = $2,081.21
$2, $2,000 = $81.21
$81.21 / $2,000 = , or 4.06%