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Certificates of Deposit

SECTION. 12-1. pp. 394-396. Certificates of Deposit. Use tables to compute: interest on certificates of deposit. Section Objective. Key Words to Know. certificate of deposit (p. 394)

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Certificates of Deposit

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  1. SECTION 12-1 pp. 394-396 Certificates of Deposit

  2. Use tables to compute: • interest on certificates of deposit Section Objective

  3. Key Words to Know certificate of deposit (p. 394) A kind of savings account that requires a specific deposit for a specified period of time, and which earns a higher rate of interest than a regular savings account.

  4. Formula 1 Amount = Original Principal × Amount per $1.00

  5. Formula 2 Interest Earned = Amount – Original Principal

  6. Life after Working Shifts p. 394 If you want to find the best rate for a CD, is it best to consult only your neighborhood bank?

  7. Example 1 Paul Crates invests $4,000 in a 1-year certificate of deposit that earns interest at an annual rate of 5 percent compounded monthly. How much interest will he earn at the end of 1 year? (Refer to the Amount of $1.00 Invested—Daily, Monthly, and Quarterly Compounding table on page 800 of your textbook.)

  8. Example 1 Answer: Step 1 Find the amount. Original Principal × Amount per $1.00 $4,000 × 1.051162 = $4,204.648 or $4,204.65

  9. Example 1 Answer: Step 2 Find the interest earned. Amount – Original Principal $4,204.65 – $4,000.00 = $204.65

  10. Example 2 Ching-Hsia Chan can invest $5,000 in a 1-year CD at 4 percent compounded monthly or a 1-year CD compounded daily. What is the difference earned in each investment?

  11. Example 2 Answer: Step 1 Find the interest earned in each investment. Monthly: $5,000 × 1.040742 = $5,203.71 $5,203.71 – $5,000 = $203.71 Daily: $5,000 × 1.040808 = $5,204.04 $5,204.04 – $5,000 = $204.04

  12. Example 2 Answer: Step 2 Find the difference earned in each investment. Difference: $204.04 – $203.71 = $0.33

  13. Practice 1 Refer to the Amount of $1.00 Invested—Daily, Monthly, and Quarterly Compounding table on page 800 of your textbook. $25,000 at 7.75 percent for 1 year compounded daily or 1 year compounded monthly. Find the difference in the amount of interest for each investment.

  14. Practice 1 Answer $6.50

  15. Practice 2 Refer to the Amount of $1.00 Invested—Daily, Monthly, and Quarterly Compounding table on page 800 of your textbook. $4,500 invested at 8.75 percent for 4 years compounded daily or 9 percent for 4 years compounded quarterly. What is the amount of each CD at maturity? Which CD earns the most interest? By how much?

  16. Practice 2 Answer 8.75% compounded daily is worth $6,385.54 9% compounded quarterly is worth $6,424.29 9% compounded quarterly earns $38.75 more than 8.75% compounded daily

  17. END OF SECTION 12-1 Certificates of Deposit

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