Download CH. 4 KEY - Allen ISD

CH 4 FINANCE
DEPOSITS IN BANKS
4.1 -DEPOSIT ACCOUNTS FALL INTO 2 CATEGORIES:
1. TRANSACTION ACCOUNTS
2. TIME DEPOSITS
1. TRANSACTION ACCOUNTACCT. THAT ALLOWS UNLIMITED TRANSACTIONS (CHECKS, DEBIT CARD)
DEMAND DEPOSIT ACCOUNT- CHECKING ACCOUNT (CHECKS, DEBIT CARD)
BASIC- OFFERS A FEW SIMPLE SERVICES FOR MINIMAL COST
(NON INTEREST BEARING ACCOUNT)
INTEREST BEARING- CHECKING ACCOUNTS THAT PAY INTEREST FOR THE
AMOUNT DEPOSITED.
2. TIME DEPOSITS- DEPOSITS THAT ARE HELD FOR A PERIOD OF TIME, LIMITED AMOUNT
OF WITHDRAWALS ALLOWED.
SAVINGS ACCOUNTS- INTEREST BEARING ACCOUNTS> LIMITED WITHDRAWALS
MONEY MARKET DEPOSIT ACCOUNTS (MMDAs)- LIKE A SAVINGS ACCT, BUT OFFERS
A HIGHER RATE OF INTEREST AND A HIGHER MINIMUM DEPOSIT.
CERTIFICATE OF DEPOSIT (CD)- AN ACCOUNT THAT LOCKS IN THE INTEREST AND
RATE OF TIME (PENALTY FOR EARLY WITHDRAWAL). MATURITY DATE=EXPIRATION DATE
PAGE 89
THINK CRITICALLY
What factors should be considered when contemplating a Certificate of Deposit (CD)?
Do you think interest rates will increase or decrease over the length of the time deposit.
Will you need the money before the maturity date (penalty for early withdrawal)
4.2 INTEREST
INTEREST- THE COST OR PRICE OF MONEY
CALCULATING INTEREST (SIMPLE INTEREST)
P x R x T=I
P- PRINCIPAL
R- RATE
T- TIME ( IF A FRACTION OF A YEAR EXPRESSED W/ DECIMALS)
I- INTEREST
EXAMPLE: Calculate the simple interest earned on a savings account in 9 months that begins with a
deposit of $2,200 and pays 4 ½ percent interest.
$2,200 x .045 x .75 = $74.25
COMPOUND INTEREST- ADDING INTEREST TO THE PRINCIPAL AND PAYING INTEREST ON
THAT NEW TOTAL AMOUNT. EARNING INTEREST ON INTEREST.
n
FORMULA:
F= P(1 + R)
F= future value
P= principal
R= rate
N= number of intervals
EXAMPLE: A CD for $1,000 @ 5% would be worth what in 3 years?
3
FV= 1,000 ( 1+.05)
FV=$1,157.63
ANNUAL PERCENTAGE RATE- THE NOMINAL RATE ON WHICH INTEREST IS CALCULATED
PER YEAR
ANNUAL PERCENTAGE YIELD- APY- REPRESENT THE INTEREST RATE ADDING IN THE
COMPOUNDING EFFECT.
INTEREST CALCULATIONS
1. A $10,000 CD AT 3 ½ % EARNS HOW MUCH INTEREST IN ONE YEAR (Compounded
Annually)?
P x R x T=I
$10,000 x (.035)x 1= $350
2. HOW MUCH IN 6 MONTHS?
P x R x T=I
$10,000 x (.035)x .5= $175
3. HOW MUCH INTEREST IN 3 YEARS (Compounded Annually)?
*USE THIS FORMULA IF COMPOUNDING MULTIPLE YEARS
n
F= P(1 + R)
3
F= $10,000 (1.035)
F= $11,087.18
OR
Year 1 $10,000 x (1.035)= $10,350
Year 2 $10,350 x (1.035)= $10, 712.25
Year 3 $10,712.25 x (1.035)= $11,087.18
4. A $10,000 SAVINGS ACCOUNT EARNS INTEREST AT 2% BUT IT IS PAID SEMI-ANNUALLY
( 2X PER YEAR). WHAT IS ITS VALUE AFTER 1 YEAR.
P x R x T=I
$10,000 x .02 x .5 = $100
$10,100 x .02 x .5 = $101
Add $10,000 + $100 + $101= $10,201 value after 1 year
CH. 4 “DEPOSITS IN BANKS”
5. ON YOUR OWN
You deposit $100,000 into a CD (Certificate of Deposit).
You earn 2% interest, compounded annually for 3 years.
Show me how much your account is worth for each of the 3 years.
n
F= P(1 + R)
3
F= $100,000 (1.02)
F= $106,120.80
OR
Year 1 $100,000 x (1.02)= $102,000
Year 2 $102,000 x (1.02)= $104,040
Year 3 $104,040 x (1.02)= $106,120.80
CH 4 FINANCE
DEPOSITS IN BANKS
4.3 FLOW OF DEPOSITS
INTERBANK TRANSACTIONS- Banks loan money to each other (at Fed Funds Rate) to cover the reserve
requirement
Deposits and the FEDS:
If reserve requirements are low then-more money can be used for loans instead of reserves
HELPS EXPAND THE MONEY SUPPLY
If reserve requirements are high then- more money must be used for reserves (money contracts)
Adjusting the money supply:
The Federal Reserve can put more money into the economy (how and why)Lowering Reserve Requirements, Buy US government securities on the open market,
Lowering Interest Rates (Discount Rates)
The Federal Reserve can effectively take money out of the economy (how and why)Raising Reserve Requirements, Sell US government securities, Raising Interest Rates (discount)
QUESTIONS
How does the Federal Reserve influence the flow of deposits?
They can buy or sell bonds (govt securities) or adjust the discount rate
How might political or national events affect the flow of deposits in the banking system?
Events or political pressure could encourage the FEDS to buy or sell bonds (govt securities) or adjust the
discount rate
Give examples of daily economic activities that are more likely to have predictable effects on the flow of
deposits.
If the stock market tanks the FEDS could lower interest rates and purchase gov’t securities (bonds) from
banks to temporarily stimulate the economy.
4.4 DEPOSIT REGULATIONS
List and explain the 5 required disclosures of account documents:
Page 100 (BOLDED TERMS)
Account rules will cover what 11 topics- briefly describe each:
Page 101-102 (BOLDED TERMS)