CERTIFICATES OF DEPOSITCD’S

InvestmentsLesson 12.1

Vocabulary

Invest- To commit money in order to earn a financial return. Earn interest

Certificate of Deposit (CD)- A kind of savings account that requires a specific amount deposited for a specific period of time. It usually earns a higher interest rate that a regular savings account. Interest is usually compounded daily, monthly or quarterly You can be penalized for early withdrawal

Maturity- The specific amount of time when you can “cash-in” to get the full value of the CD. Principal + Interest

To invest in CD’s, you start with one relatively large deposit.

What are some situations that you might have a large sum of money that you do not currently need to use?

Tax return Bonus from work Graduation Inherence Sell of property Gift (marriage, holiday,..) Legal settlement Lottery/winnings Overtime earnings Vacation pay Profit from other

investments

Formulas

Amount = Original Principal X Amount of $1.00(refer to table A14)

Compound Interest = Amount – Original Principal

Compound Interest Formula from Ch. 5 page 229

A.J. deposits $50,000 in a 4-year CD that earns interest at an annual rate of 5.25% compounded daily.

a) Find the amount of the CD in 4-yearsAmount = Original Principal X Amount of $1.00Amount = (50,000) (1.233659)Amount = $61682.95b) Find the interest earned in 4-yearsCompound Interest = Amount – Original

PrincipalCompound Interest = 61682.95– 50,000Compound Interest =$11682.95

Clayton and Madison can purchase a 4-year CD for $10,000 at 4.5% compounded daily or monthly.

a) What is the amount of each CD at maturity?Amt Daily=(10,000)(1.197204) Amt Month=(10,000)(1.196814)Amt Daily= $11972.04 Amt Month= $11968.14

b) What is the difference in the interest earned?11972.04 – 11968.14=$3.90

Cody Deposits $5,000 in Beacon Credit Union’s 5-year CD, which pays 5.22% compounded monthly. Find the value of the CD at maturity and interest he

earned.

Since 5.22% and 5-year is not on our table, we are going to have to use the formula from Ch. 5.

Cody Deposits $5,000 in Beacon Credit Union’s 5-year CD, which pays 5.22% compounded monthly. Find the value of the CD at maturity and interest he

earned.

Cody Deposits $5,000 in Beacon Credit Union’s 5-year CD, which pays 5.22% compounded monthly. Find the value of the CD at maturity and interest he

earned.

Any Questions?