Chapter 6.1, Problem 1R

To determine

To evaluate: The importance of saving, interest, savings account, money market deposit account, time deposits, maturity and certificates of deposit.

Explanation of Solution

It's important to save money, because it protects us in the event of a financial crisis. Saving money will also allow us to plan for big purchases, avoid debt, reduce the financial burden, establish a financial legacy and give us a greater sense of freedom from finance. As we pile up money, our financial problems will decrease.

Currently the cost of borrowing money is relatively low. However, the wide admissibility of interest first became prominent during the Renaissance. One of the significant elements of the economic system is interest rates. They impact interest rates, return on assets and are an integral part of the overall return of many investments. In addition, other interest rates offer insight into future actions on the economic and financial markets.

A bank or financial institution keeping an interest-bearing deposit account is called a savings account. Although these accounts typically pay a modest rate of interest, their security and stability make them a good option for saving cash that we all want for short-term needs to be accessible. Savings plans have certain limits on how much we can withdraw money, but usually provide great freedom to create an emergency fund.

A savings account on the money market at a credit union or bank is an interest-bearing portfolio which should not be mistaken with a mutual fund on the stock market. MMA (Money Market Accounts) also recognized as MMDA has some elements which are not included in other accounts.

Many money market accounts pay interest rate higher than traditional savings passbook accounts that often involve debit card and check writing These also come with constraints which make the flexibility low than a standard checking account. These are necessary to calculate net worth in real terms.

An interest-bearing bank account with a pre - determined date of maturity is labeled a time deposit. The most well-known example is a Certificate of Deposit (CD). In order to obtain the agreed rate of interest, the money must stay in the account for the set duration. Time deposits usually pay a rate of interest which is higher than a standard savings account. The longer the maturity period, the higher the interest rate will be. One can buy a time deposit like a CD at virtually any credit union, bank or other finance company. Among other variables the interest rates paid will vary.

Maturity is the day that a contract or financial instrument's life expires, on which it must be either renewed or revoked. The term is popularly used for deposits, foreign currency spot, and forward trading, interest rate and product swaps, future prospects, loan repayments, and fixed income instruments, including bonds. They're also modified by bonus levels as part of promotions.

A service issued by credit union and banks that provide a premium interest rate in exchange for the consumer who wishes to not change a lump-sum deposit for a specified period is called a Deposit Certificate (CD). While it is up to each bank the CD rates it wishes to provide, how much higher the rate will be relative to the savings and money market items of the bank, and what fines it offers for early withdrawal, nearly every consumer financial institution offers them.

Economics Concept Introduction

Introduction: Banking can be described as the business practice of taking and safeguarding money owned by other individuals and institutions, and then loaning it out for profit earning. Nevertheless, the activities covered by the sector of banking have expanded with the passage of time, and banks are now also providing numerous other services.