Bank Accounts
What things do you need to think about when selecting a bank account type? (value account, self-service, full-service, bonus savings)
- How many withdrawals
- Number of bill payments
- How many debit purchases
- Charges for teller assisted services
- If you can collect interest
Describe the difference between simple and compound interest
Simple - only gain interest on starting principal
Compound - principal grows and interest is earned on that growing amount
How many compounding periods are there:
1) semi-annually?
2) monthly?
3) quarterly?
4) daily?
1) 2
2) 12
3) 3
4) 365
List 2 pros and 2 cons of a debt card...
Pros - simple, using your own cash, interest free, easier for budgeting.
Cons - not as secure, card can be declined, not able to reserve hotels/flights
What is the difference between an asset and collateral?
Asset - an item of economic value owned by an individual that could be converted to cash (ie: a vehicle, home, cabin)
Collateral - an item of value pledged by a borrower to secure a loan (ie: a piece of land could back a mortgage)
What is the difference between self-service and full-service banking?
Self-Service refers to managing your finances independently using digital tools or ATMs without a teller. (bay bills, transfer funds, e-deposit of a cheque)
Full-Service banking involves interacting directly with in-branch bank staff for personalized assistance (opening/closing accounts, currency exchange, lost card)
Simple Interest Formula
I = Prt
What do each of these letters represent?
I = interest
P = principal
r = rate (MUST CONVERT to a decimal)
t = the term (in YEARS)
If you invest $1000 and it compounds semi-annually at a rate of 3.5%. How much will the account balance be after 5 years?
A = P(1+r/n)nt (exponent)
A = 1000(1+0.035/2)(2x5)
A = $1189.44
Cons - can get into bad debt, people tend to overspend with credit than cash
A personal loan is taken out for $5000 for a skidoo. The annual rate was 6.25% over a 3 year period.
Using the chart given, the monthly payment will be $152.70.
1) How much will this loan cost you over the 3 year period?
2) Calculate the finance charge (interest cost) on the loan.
1) $152.70 x 36 (months) = $5497.20
2) The interest will be $5497 - $5000 = $497.20
What this means... it will cost you almost $500 over 3 years to get a loan for $5000 at 6.25%.
What term describes the "money you pay to the bank for various services"?
Fee
You invest $7500 in a savings account at a 3% interest rate over 5 years... how much interest do you earn?
How much would you earn if you were able to leave it in the account for an additional 5 years?
I = Prt
I = 7500(0.03)(5) = $1125
I = 7500(0.03)(10) = $2250
An initial investment was $6000... interest compounds at 4% quarterly. The investment will stay in the account for 10 years. How much interest will be earned?
A = P(1+r/n)nt
A = 6000(1+.04/4)(4 x 10)
A = $8933.18
I = $8933.18-6000 = $2933.18
How can you avoid interest charges if you own a credit card?
- Pay off the entire balance on or before it is due (as noted on your statement)
A payday loan is a high interest loan that people take to "tide them over" until the next pay day.
Solve for the interest in this scenario...
Friends want to book a trip to watch the Jays this summer. You don't have enough for flights right now so you take a payday loan for $500. You agree to pay $550 and will pay it back in 10 days.
What is the daily interest rate you have to pay?
What is the annual interest rate?
I = Prt
50 = 500(r)(10)
r = 0.01 or 1% daily
1% daily x 365 = 365% annually - can you see why this would be a horrible idea long term?!
* Mr. Clifford can you clarify why we can put in 10 days for time in this situation?
What term matches this definition: The amount of money in a financial account at any given moment. It can also be the amount of money owed to a third party (CC company, utility company).
Balance
You are investing $25000 at a 1.75% annual interest rate over 17 months. How much interest have you earned? What is the balance of your investment account at the end of 17 months?
I = Prt
I = 25000(0.0175)(1.42)
I = $621.25
Balance = $25000+$621.25
= $25621.25
The Rule of 72 states that if you divide 72 by the annual interest rate percentage to estimate how long it takes to double an investment. The answer will be given in years.
How many years would it take to double your investment at an interest rate of 5%?
72/5 = 14.4 years
Calculate interest due on the following CC balance and the minimum payments (5% or $10, whichever is greater)
Unpaid balance $265.67, interest rate per annum 20%, time = 30 days.
I = PrtI
I = (345.67)(0.2)(30/365)
I = $5.68
Total = $345.67+$5.68
= $351.35
5% of 351.35 is $17.57... must pay 5% as it is greater than the $10 minimum
Grab your chart...
You take a loan for $2500 at 8% interest over 3 years...
1) What is your monthly payment? (remember the chart is per $1000 borrowed)
2) What is your total loan payment amount over 3 years?
3) How much interest did you pay over the 3 years?
$31.34 x 2.5 (because the chart is per $1000 borrowed)...
1. Monthly payment is $78.35
2. Total loan = $78.75 x 12 x 3 (or x 36)
= $2820.60
3. Interest Paid = $2820.60-2500 = $320.60
1) If she withdraws $60, how much does this transaction cost her?
2) If she uses an ATM once a week for a full year, how much will she be "losing" in fees?
3) What is one solution Laura could consider to get around these fees?
1) $3.50
2) $3.50 x 52 = $182.00
3) Use her banks ATMs, withdraw more each time and use it over additional weeks.
$150
Will has a $10,000 investment that offers an interest rate of 2.5% per annum, compounded monthly.
If he invests in it for 5 years, how much will the investment be worth at the end of the term?
A = P(1+r/n)nt
A = 10000(1+0.025/12)(12 x 5)
A = 10000(1.002)(60)
A = $11330.01
Dave's CC company charges 19.5% interest per annum. On his statement dated May 18th, he showed a balance owing of $1475.55.
He paid only the minimum (5% or $10, whichever is higher).
How much will his next statement be if he doesn't use his card again before the next statement date?
(HINT - you need to subtract the minimum first and then calculate the interest next... the statement balance would be the remaining balance and monthly interest charge)
Min. Payment = 1475.55 x 0.05 = $73.78
Remaining Balance = 1475.55 - $73.78 = $1401.77
Next... times the balance owing by the interest rate
Monthly Interest rate = 19.5/12 = 1.625%
Monthly Interest Added = $22.78
Remaining balance + Monthly Interest = $1424.55
You borrow $45,000 to buy a vehicle. You will pay it back over 5 years and got an interest rate of $3.25 percent.
How much will you actually pay back the bank (including principal and interest) in the 5 year term?
Monthly payment = $18.08 x 45 = $813.60
Cost of entire term = $813.60 x 12 x 5
= $48,816