CH 4 FINANCE



CH 4 FINANCE DEPOSITS IN BANKS4.1 -DEPOSIT ACCOUNTS FALL INTO 2 Categories:TRANSACTION ACCOUNTSTIME DEPOSITSTRANSACTION ACCOUNT- ACCT. 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 (Pays a higher rate of Interest)SAVINGS ACCOUNTS- INTEREST BEARING ACCOUNTS> LIMITED WITHDRAWALSMONEY MARKET DEPOSIT ACCOUNTS (MMDAs)- LIKE A SAVINGS ACCT, BUT OFFERSA 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 DATEEXAMPLE: $10,000 CD for 1 year, 2% interestPAGE 89 THINK CRITICALLYWhat 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)INTERESTINTEREST- The Cost or Price of MoneyCALCULATING INTEREST (SIMPLE INTEREST)P x R x T = IP- PRINCIPALR- RATET- TIME ( IF A FRACTION OF A YEAR EXPRESSED W/ DECIMALS)I- INTERESTEXAMPLE: Calculate the simple interest earned on a savings account in 9 months that begins with a deposit of $2,200 and pays 4 ? percent interest.$2,200 x .045 x .75 = $74.25COMPOUND INTEREST- ADDING INTEREST TO THE PRINCIPAL AND PAYING INTEREST ON THAT NEW TOTAL AMOUNT. EARNING INTEREST ON INTEREST.*USE THE CALCULATOR ON THE COMPUTER> SCIENTIFIC CALCULATOR (VIEW)or link on my web page (interest calculator) nFORMULA: F= P(1 + R)F= future valueP= principalR= rateN= number of intervalsEXAMPLE: A CD for $1,000 @ 5% would be worth what in 3 years? 3FV= 1,000 ( 1+.05) FV=$1,157.63ANNUAL PERCENTAGE RATE- THE NOMINAL RATE ON WHICH INTEREST IS CALCULATED PER YEARANNUAL PERCENTAGE YIELD- APY- REPRESENT THE INTEREST RATE ADDING IN THE COMPOUNDING EFFECT.INTEREST CALCULATIONSA $10,000 CD AT 3 ? % EARNS HOW MUCH INTEREST IN ONE YEAR (Compounded Annually)?P x R x T = I$10,000 x (.035)x 1= $350HOW MUCH IN 6 MONTHS?P x R x T = I$10,000 x (.035)x .5= $175HOW 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= $11,087.18ORYear 1 $10,000 x (1.035)= $10,350Year 2 $10,350 x (1.035)= $10, 712.25Year 3 $10,712.25 x (1.035)= $11,087.18A $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 = $101Add $10,000 + $100 + $101= $10,201 value after 1 yearCH. 4 “DEPOSITS IN BANKS” ON YOUR OWN- Show simple interest and Compound interest calculations (both) 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.I WILL HELP YOU SET UP THE 2 WAYSCH 4 FINANCEDEPOSITS IN BANKSFLOW OF DEPOSITSINTERBANK TRANSACTIONS- Banks loan money to each other (at Fed Funds Rate) to cover the reserve requirementDeposits and the FEDS: If reserve requirements are low then-more money can be used for loans instead of reservesHELPS 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)QUESTIONSHow does the Federal Reserve influence the flow of deposits?They can buy or sell bonds (govt securities) or adjust the discount rateHow 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 rateGive 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. DEPOSIT REGULATIONSList and explain the 5 required disclosures of account documents:Account rules, Deposit rate schedules, Fee schedules, Check hold policy, Disclosure statement ................
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