Chapter 3 – Banking
Vocabulary:
Interest – money paid to an individual or institution for the privilege of using their money.
Transaction – something that has to be recorded, such as a deposit or withdrawal.
Principal – the amount of money a loan is given for and which interest is paid on.
Time – the length of a loan which is usually based on a year time frame.
3-1 Savings Accounts
- Simple Interest – interest that is calculated as such:
Interest = Principal x Rate x Time
How much interest will I earn if I put $500 into a savings account for one year that pays 5% interest?
$500 x .05 x 1 = $25.00 …..at the end of the year I can take out $525.00 of my account.
I = P x R x T
I = Interest
P = Principal – base amount loan is for
R = Rate – percentage rate of interest paid
T = Time that loan is taken for or interest calculated
- Calculating Compound Interest – Very similar to simple interest except you recalculate more often and add the interest to the previous principle.
I = P x R x T
Ex: Peter Smith deposited $800 in a savings account that pays 6% interest, compounded quarterly. He made no other deposits or withdrawals. If interest is calculated and paid on April and July 1, find the account balance on July 2.
I = P x R x T
$800 x .06 x .25 = $12.00
$812 x .06 x .25 = $12.18
$24.18 is the total compound interest
$12 = $800 x 6% x ¼
- Interest Tables
How many times would you have to calculate interest if a person put $12,000 into an account they had quarterly compound interest for 10 years?
Can we make it easier? Yes!!!
- Compound Interest Tables –Compound interest tables are designed to allow people to computer compound interest without extensive calculating.
EX: Ginny Leatherman had $550 in a savings account that paid 6% interest compounded quarterly. How much interest was earned in 3 years?
Here are the steps to use them:
1. Divide the annual interest rate by the number of times the inters rate is compounded each year.
EX: 6% /4 = 1.5%
2. Calculate the number of periods by multiplying the number of times per year the interest will be compounded by the number of years.
EX: 4 x 3 = 12
3. Using the chart, find the intersection of the number of periods and the interest rate.
EX: 1.195618
4. Multiply the principal of the loan by the amount in the chart.
EX: 1.195618 x $550 = $657.59
5. Subtract the principal from the total amount to find just the interest.
EX: $657.59 - $550.00 = $157.59 compound interest
3-2 Checking Accounts
When you open a checking account, you need to sign a signature card so the bank has your signature on file and you must put money into the account by filling out a deposit slip.
- Deposit Slip – lists all the money and checks you are putting into your account.
Currency – paper money such as dollar bills
Coins – any coin such as a penny, nickel, dime, quarter, half dollar and dollar.
- Check Register – this is part of the checkbook in which all deposits and checks are recorded. An accurate running balance should be kept at all times.
Bounced Check – when a check is written and there isn’t enough money in the account to pay for it….also sent back as “insufficient funds”
Overdraft Protection – when the bank will cover your bounced check until you put more money into your checking account to cover it.
3-3 Electronic Banking – allows customers to use telephones, computer, and other technologies in place of paper transactions….also using ATM machines.
Some ATM machines may charge a fee to use it.
Debit Card – an ATM card can also be used as a debit card which tells the bank to take the money out of the account immediately for that specific transaction.
Direct Deposit - when a employees allow their company to send their paycheck directly to the bank.
Online banking – allows you to do your banking through a computer.