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Examples of Bank Savings

A checking account offers unrestricted access to money with low or no monthly fees. Money
is transacted through online transfers, automated teller machines(ATMs), debit
card purchases or by writing personal checks. A checking account pays lower interest rates
than other bank accounts.

A savings account pays interest on cash not needed for daily expenses but available for an
emergency. Deposits and withdrawals are made by phone, mail or at a bank branch or ATM.
Interest rates are higher than on checking accounts.

A money market account requires a higher minimum balance, pays more interest than other
bank accounts and allows few monthly withdrawals through check-writing privileges or debit
card use.

A certificate of deposit (CD) limits access to cash for a certain period in exchange of a higher
interest rate. Deposit terms range from three months to five years; the longer the term, the
higher the interest rate. CDs have early-withdrawal penalties that can erase interest earned,
so it is best to keep the money in the CD for the entire term.

de·pos·it
a sum of money placed or kept in a bank account, usually to gain interest.

Interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount
above repayment of the principal sum (i.e., the amount borrowed), at a particular rate.[1] It is distinct from a fee which
the borrower may pay the lender or some third party. It is also distinct from dividend which is paid by a company to
its shareholders (owners) from its profit or reserve, but not at a particular rate decided beforehand, rather on a pro
rata basis as a share in the reward gained by risk taking entrepreneurs when the revenue earned exceeds the total
costs.[2][3]

Calculation of interest[edit]
Simple interest[edit]
Simple interest is calculated only on the principal amount, or on that portion of the principal amount that remains. It
excludes the effect of compounding. Simple interest can be applied over a time period other than a year, e.g., every
month.
Simple interest is calculated according to the following formula:
where
r is the simple annual interest rate
B is the initial balance
m is the number of time periods elapsed and
n is the frequency of applying interest.
For example, imagine that a credit card holder has an outstanding balance of $2500 and that
the simple annual interest rate is 12.99% per annum, applied monthly, so the frequency of
applying interest is 12 per year. Over one month,

interest is due (rounded to the nearest cent).


Simple interest applied over 3 months would be
If the card holder pays off only interest at the end of each of the 3 months, the total
amount of interest paid would be
which is the simple interest applied over 3 months, as calculated above. (The one
cent difference arises due to rounding to the nearest cent.)

Compound interest[edit]
Main article: Compound interest

See also: rate of return

Compound interest includes interest earned on the interest which was previously
accumulated.
Compare for example a bond paying 6 percent biannually (i.e., coupons of 3
percent twice a year) with a certificate of deposit (GIC) which pays 6 percent
interest once a year. The total interest payment is $6 per $100 par value in both
cases, but the holder of the biannual bond receives half the $6 per year after only 6
months (time preference), and so has the opportunity to reinvest the first $3
coupon payment after the first 6 months, and earn additional interest.
For example, suppose an investor buys $10,000 par value of a US dollar bond,
which pays coupons twice a year, and that the bond's simple annual coupon rate is
6 percent per year. This means that every 6 months, the issuer pays the holder of
the bond a coupon of 3 dollars per 100 dollars par value. At the end of 6 months,
the issuer pays the holder:
Assuming the market price of the bond is 100, so it is trading at par value,
suppose further that the holder immediately reinvests the coupon by spending
it on another $300 par value of the bond. In total, the investor therefore now
holds:
and so earns a coupon at the end of the next 6 months of:
Assuming the bond remains priced at par, the investor accumulates at
the end of a full 12 months a total value of:
and the investor earned in total:
The formula for the annual equivalent compound interest
rate is:
where
r is the simple annual rate of interest
n is the frequency of applying interest
For example, in the case of a 6% simple annual rate, the annual equivalent compound rate is: