Page 475 - Business Principles and Management

Unit 5

Success tip above a certain minimum amount. If a balance falls below the minimum, the bank

may charge a service fee or eliminate the interest. Investors with small sums of
money find interest-bearing checking accounts a convenient way to save while
Ethics and social responsibility having easy access to the funds to pay expenses. Because checking accounts are
are guiding many investment not primarily designed as savings instruments, however, they serve an investment
decisions. This is defined as purpose only to a limited extent. If interest is paid, the interest earned is relatively
“putting your money where small in comparison to most other investments, including savings accounts.
your morals are,” or investing
according to your beliefs. SAVINGS ACCOUNTS A savings account is also a time deposit account that allows cus-
Ethical investments tend to tomers to make deposits, earn interest, and make withdrawals at any time without
avoid companies involved in financial penalties. Customers can deposit small amounts, but the interest rates are
areas such as environmentally usually lower than those on other investment instruments. The bank may charge a
damaging practices or unsafe service fee if the amount on deposit falls below the minimum balance required. In-
products and services, and terest rates may increase if the amount placed in savings is relatively high. However,
those that operate in coun- the interest rate is still quite low compared to those on other investment choices.
tries with poor human rights Savings accounts are often used to make regular deposits with the goal of increasing
records. the value of the account over time. Investors try to meet their longer-term savings
goals by not withdrawing money from the savings account for immediate needs.

SAVINGS BONDS Savings bonds are non-negotiable securities sold by the U.S.
Treasury in small denominations to individual investors. They can be purchased
in denominations from $25 to $30,000. Savings bonds earn interest for up to
30 years. However, they can be redeemed at any time after six months. A penalty
of three months of earned interest is charged if the bonds are redeemed within
the first five years.
There are currently two series of savings bonds. Series EE bonds pay a fixed in-
terest rate, and the interest is paid when the bond is redeemed. Series I bonds pay in-
terest in two components: a basic fixed-rate established when the bond is purchased,
then an adjustment to that rate made each year based on the rate of inflation.
Savings bonds can be purchased from any bank or through a payroll deduction
plan at work. They can also be purchased online through the U.S. Department
of Treasury. Unlike other Treasury instruments, ownership of savings bonds cannot
be transferred. State and local income taxes do not have to be paid on the interest
earned.

CERTIFICATES OF DEPOSIT A certificate of deposit (CD) is a time deposit account that
requires a specified minimum deposit for a fixed period at a fixed interest rate.
Banks offer CDs for $500 or more and for periods ranging from three months to
five years. Typically, the longer the term of the CD, the higher the interest rate
earned. For example, the interest rate on a six-month CD is normally less than
on a two-year CD. Although CDs usually pay a higher rate of interest than do
savings accounts without restrictions, a CD cannot be withdrawn before its
stated time without penalty—a substantial loss of earned interest.
Interest is paid regularly on a CD, and the interest can be withdrawn as it is
earned. If the interest is not withdrawn, it is added to the value of the CD and
earns additional interest during the remaining term. CDs are negotiable instru-
ments, so if money is needed the CD can be sold to an investor (often the bank that
issues the CD). However, the sale will be at a lower value than the current value of
the CD and interest earned, unless interest rates have increased significantly.

MONEY MARKET ACCOUNTS A money market account is a type of savings account
in which the deposits are invested by the financial institution in short-term,
government-backed securities. The interest rate on the account is not fixed. It
goes up and down as interest rates in the economy change. Financial institutions

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