Question

GREAT START COMMUNITY BANK
Savings Rates

Regular Passbook	Interest Rates 0.10%
**Money Market Savings or Checking Plus	Savings	Checking
$50,000 or greater	0.30%	0.20%
$25,000 to $49,999	0.20%	0.10%
$10,000 to $24,999	0.10%	0.10%
$1,000 to $9,999	0.10%	0.10%
**Balances below $1,000 earn the regular Passbook Rate. **Fees could reduce earnings on accounts.
**Certificates of Deposit ($500 minimum)	A.P.Y.	Interest Rate
31-day CD	0.10%	0.099%
32-day to 179-day CD	0.10%	0.099%
6-month CD	0.25%	0.249%
1-year CD	0.50%	0.499%
18-month CD	0.75%	0.749%
18-month Variable Rate CD	0.75%	0.749%
(add deposits anytime during term)
2-year CD	1.00%	0.995%
3-year CD	1.51%	1.500%
4-year CD	1.76%	1.749%
5-year CD	2.01%	1.990%
**A penalty may be imposed for early withdrawal.

6.

Brent has saved $3,000 toward his daughter’s college education. He plans to keep this money in Great Start Community Bank. The chart above displays the bank’s current savings account rates. Use the compound interest calculator below to compute your answers to the following questions.

Note: You will use an online financial calculator to answer some questions in this competency. Round off your answers to two places to the right of the decimal point.

6a. Brent chooses to deposit $3,000 at Great Start Community Bank for one year in a regular savings account (also referred to as Regular Passbook Savings). The interest is compounded monthly. How much interest will he earn?

6b. If, instead, Brent invests his $3,000 into a one-year CD (which compounds interest monthly), how much interest will he earn?

6c. Brent finally decides to open a five-year CD and deposit $3,000 into this account. The interest on this particular account compounds monthly. Calculate how much money the CD will be worth at the end of five years.

Answer 1

Answer - 6a

Brent deposit $3,000 at Great Start Community Bank for one year in a regular savings account at the rate of 0.10% per annum (as per the given table of regular passbook savings rate) compounded monthly.

Interest = Deposit (1 + Rate)ⁿ - Deposit

Where-

Deposit amount is $3,000

Rate = 0.10% / 12

Rate = 0.008333% or 0.00008333

n = 12

On putting the figures in the above formula, we get:

Interest = Deposit (1 + Rate)ⁿ - Deposit

Interest = $3000 (1 + 0.00008333)¹² - $3000

Interest = $3000 * 1.001084 - $3000

Interest = $3003.25 - $3000

Interest = $3.25

Answer - 6b

Brent invests his $3,000 into a one-year CD at the rate of 0.499% per annum (as per the given table of certificates of deposit rate) compounded monthly or at the APY (annual percentage yield) rate of 0.50%.

APY rate is the rate which takes the effect of monthly compounding into consideration and hence the APY rate is only considered for calculating interest on one-year CD.

Interest = Deposit * APY rate

Where-

Deposit amount is $3,000

Rate = 0.50%

On putting the figures in the above formula, we get:

Interest = Deposit * APY rate

Interest = $3000 * 0.50%

Interest = $15

Answer - 6c

Brent invests his $3,000 into a five-year CD at the rate of 1.990% per annum (as per the given table of certificates of deposit rate) compounded monthly or at the APY (annual percentage yield) rate of 2.01%

APY rate is the rate which takes the effect of monthly compounding into consideration and hence the APY rate is only considered for calculating the worth of money invested in five-year CD.

Amount of CD after 5 years = Deposit (1 + Rate)ⁿ

Where-

Deposit amount is $3,000

Rate = 2.01% or 0.0201

n = 5

On putting the figures in the above formula, we get:

Amount of CD after 5 years = Deposit (1 + Rate)ⁿ

Amount of CD after 5 years = $3000 * (1 + 0.0201)⁵

Amount of CD after 5 years = $3000 * 1.0201⁵

Amount of CD after 5 years = $3000 * 1.104622

Amount of CD after 5 years = $ 3313.87