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Money Smarts
Chapter 1 Money Smarts:
How Does Your Money Grow?
How much will your investment increase
in value? Suppose you want to put money in a certificate of
deposit. A certificate of deposit (CD) is an investment
that requires you to leave your money in a financial institution
for a set amount of time. The amount your CD increases in
value will be affected by the interest rate, the length of
time you keep your money invested, the income tax rate, and
the compounding.
Compounding is the ability of
your earnings to earn additional earnings. You receive interest
not only on your original deposit, but also on previously
earned interest. The annual percentage yield (APY)
is the rate of return actually paid in one year, after compounding.
With compounding, your money increases faster.
Go to the BusinessWeek Online
Personal
Finance Planning calculators. Scroll down to the Savings
Calculators and click on “How much will my CD be worth
at maturity?”
Input the following values:
| CD amount |
$7,000 |
| Deposit date |
(Use today’s date.) |
| Deposit term |
12 Months |
| Interest rate |
4.000% |
| Compounding frequency |
Monthly |
| Your federal income tax rate |
15.00% |
| State tax (State tax info.) |
6.80% |
Click on the “get your results”
button and answer the following questions.
- What is the value of the CD at maturity?
- What is the annual percentage yield? Is the annual percentage
yield different from the interest rate that you input? Why
or why not?
- What is the total amount of taxes you will owe?
- What is the amount of interest you will earn after taxes?
- Click the INPUTS tab and change the compounding frequency
to daily. What is the value of the CD at maturity? Is it
different from the amount in your answer to Question 1?
Why or why not?
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