Copyright © 2008, The McGraw-Hill Companies, Inc.
you probably don’t think of your deposit as a loan. In reality, though, it actually is a loan.
When you are depositing money to a bank account you are actually loaning that money to
the bank. While it is in your account the bank has the use of it, and in fact does use it (to
make loans to other people.)
There are many different types of bank deposits. Checking and savings accounts
are familiar examples of ways in which we loan money to banks. These are sometimes
referred to as demand accounts, because you can withdraw your money any time that
you want (i.e., “on demand.”) Another common type of account is a certificate of deposit,
or CD. When you deposit money into a CD, you agree to keep it on deposit at the bank
for a fixed period of time. For this reason, CDs are often also referred to as term deposits
or other similar names. CDs often offer better interest rates than checking or savings
accounts, since with a CD the bank knows how long it will have the money, giving it
more opportunity to take advantage of longer term loans on which it can collect higher
interest rates.Example 1.1.12 Jake deposited $2,318.29 into a 2-year CD paying 5.17% simple
interest per annum. How much will his account be worth at the end of the term?Recall that the phrase per annum simply means per year.I PRT
I ($2,318.29)(0.0517)(2)
I $239.71At the end of the term, his account will contain both the principal and interest, so the total
value of the account will be $2,318.29 $239.71 $2,558.00.There are many different types of financial institutions that offer checking and savings
accounts, CDs, and other types of deposit accounts. Jake might have opened his CD at
a savings and loan or credit union just as well as at a commercial bank. While there are
differences in the range of services offered, eligibility to open accounts, and government
regulation among these different types of institutions, the basic principles we are working
with apply equally well to any of them. As is common practice in business, when we use
the term bank in this book, it should be understood that we are not necessarily referring
only to commercial banks, but to any sort of financial institution that offers loans and
deposit accounts.A. Interest as Difference- Adrian borrowed $2,000 and paid back a total of $2,125. How much interest did he pay?
- Sarah loaned Andrew $12,375 for 6 months. Andrew paid back $12,500. How much interest did he pay?
- Kelli loaned Kerri $785.82, and 2 years later Kerri will pay back $854.29. How much total interest will Kelli receive?
- Logan borrowed $24,318.79 and will have to repay a total of $27,174.25. How much interest will he pay?
EXERCISES 1.1
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Exercises 1.1 9cb