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Student

Date

Period

12-1

Computing Interest on Certificates of Deposit

A certificate of deposit (CD) is a type of investment that earns a higher interest rate than a regular savings account. The only drawback is that you are penalized for early withdrawal. Interest is compounded daily, monthly, or quarterly, depending on your particular financial institution.

Example

Compute the interest.

Annual

Interest

Original

Amount

Interest

Rate

Period

Principal

Earned

Morgana LeFey invests $10,000 into a 4-year certificate of deposit that earns an interest rate of

    • 5.75

      percent compounded quarterly. How much interest will she earn at the end of the 4 years?

  • 1.

    Find the amount using the Amount of $1.00 Invested table on page 180. Amount Original Principal Amount per $1.00 $10,000 1.256541 $12,565.41

  • 2.

    Find the interest.

Interest Earned Amount Original Principal $12,565.41 $10,000 $2,565.41 interest

5. Marybeth Evanston can invest $7,500 in a 1-year CD earning 5 percent interest compounded daily or a 1-year CD earning 5.25 percent interest compounded quarterly. Which rate earns her more interest? How much more? 6. Felix Capistrano invests $25,000 in a 4-year CD earning 6 percent interest compounded quarterly. What is the amount at maturity? How much interest does he earn at the end of the 4 years? 7. Standardized Test Practice Robert and Katie Masterson have the option of investing their $20,000 savings in a 4-year CD earning 5.00 percent interest compounded daily, 5.25 percent interest compounded monthly, or 5.50 percent interest compounded quarterly. Which CD

earns the most interest? A. 5% compounded daily

B. 5.25% compounded monthly

C. 5.5% compounded quarterly

D. They all earn the same amount of interest.

1.

5.50%

4 years daily

$ 6,000

a.

2.

4.25%

4 years monthly

9,500

a.

3.

3.75%

1 year quarterly

12,000

a.

4.

5.00%

1 year monthly

25,750

a.

Practice

Find the amount and the interest earned. Refer to the Amount of $1.00 Invested table on page 180.

b. b. b. b.

80

Section 12-1

Study Guide

Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

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