Unit Three

Handling Deposits

Part A Background Information

Money has the capacity to generate more money.If a given sum of money is deposited in a savings account, it earns interest; if it is used to purchase corporate stock, it earns dividends; if it is used to purchase a warehouse that is then rented to business firm, it earns rent.Thus, as time elapses the original sum of money expands through the accretion of these periodic earnings.

We shall generally use the term interest in a broad sense to denote the money earned by the original sum, regardless of whether the money earned is referred to in ordinary commercial parlance as interest, dividends, rent, or business profits.The time rate at which a sum of money earns interest is known as the interest rate; it is expressed as the ratio of the interest earned during a given period to the sum of money that is earning interest.For example, if the sum of $ 100 earns $ 10 interest in 1 year, the interest rate is 10/100, that is 10% per annum.