Bank accounts and Certificate of Deposits (CD’s) are very safe because the federal government insures them, usually up to \$100,000. However, they normally pay relatively lower interest rates than bonds do. Also, sometimes bank accounts and CD’s cannot make enough money to stay ahead of inflation. CD’s usually pay a higher interest rate than bank accounts. But bank accounts are usually accessible while CD’s have a time period with a penalty for early withdrawal. CD’s have a fixed rate, but the rate goes up as the length of time increases. For example, a 2-year CD may pay 5% interest while a 3-month CD pays 4% interest. Let’s review the math of putting money in bank accounts and CD’s. I = P ´ r ´ t where I = interest P = principal or present value (PV) r = rate of interest (decimal) t = time Susan put \$1,000 in a bank account at a 3% interest rate for 1 year. How much money from interest will she make in 1 year? I = P ´ r ´ t I = 1,000 ´ 0.03 ´ 1 I = 30 ´ 1 I = \$30 Susan made \$30 from interest in 1 year. However, if inflation is 3.5% while Susan’s bank account is still giving her a 3% interest rate, Susan is losing 0.5% purchasing power this year. By putting money in a bank account, Susan loses \$5 because of inflation. Bob put \$1,000 into CD’s at a 5% interest rate for 1 year. How much money will he make from interest in 1 year? Estimate the answer: Less than \$30 Between \$30 and \$60 Over \$60