Simple Interest vs. Compound Interest

Lesson Content

• Lesson Plan Template:

  CTE Lesson Plan

• CTE Course Info and Benchmark Notes

  
  

  Program Title (as applicable): N/A

  Course Title: Fundamentals of Finance

  Course Number: 8540400

  Career Cluster: Finance

  CIP Number: 148540400M

  Course Type: Orientation/Exploratory

  Standard(s) or benchmarks

  Focus:

  • 01.01 Developing keyboarding skills to enter and manipulate text and data.
  • 01.02 Describe and use current and emerging technology and software to perform personal and business-related tasks.
  • SS.8.FL.4.1 Explain that people who pay for loans are told what the rate on the loan will be. An interest rate is the price of using someone else’s money expressed as an annual percentage of the loan principal. Remarks/Examples: Explain that repayment of a loan includes repayment of the principal plus the interest charged. Compute the interest rate when given a principal and an amount of interest. Compute the amount of interest when given the loan principal and interest rate.

  Supporting:

  • SS.8.FL.3.5 Identify principal as the initial amount of money upon which interest is paid.

• Unit Outline

  
  

  This lesson could be taught within a unit focused on using credit. The unit can begin with an overview of loans and interest then students build on and make connections to this lesson by exploring simple interest and compound interest, credit card statements, and how to calculate credit card payments. The unit can conclude with a scenario-based activity where students provide recommendations on how to use, or preserve, credit lines based on given information.

• Career Connection

  
  

  Students will use and develop their knowledge of using formulas in spreadsheets to manipulate data which will help them understand how simple interest and compound interest are calculated. Knowing the difference between simple and compound interest and how they affect borrowers is an important skill to have when seeking to build and use credit.

• Learning Objectives

  
  

  Students will be able to:

  • Explain the characteristics of simple interest.
  • Explain the characteristics of compound interest.
  • Differentiate between simple interest and compound interest.
  • Explain how each type of interest affects the value of a loan.
  • Format cells using spreadsheet software to accurately calculate interest amounts.

• Prior Knowledge

  
  

  Students should be familiar with:

  • Calculating a percentage
  • Entering a formula into a spreadsheet
  • Principal as the initial amount of an investment or loan

• Guiding Questions

  
  
  • What is the difference between simple interest and compound interest?
  • How does knowing the type of interest help consumers make informed decisions?
  • How can formatting cells make performing calculations more efficient than other methods?

• Procedure

  
  

  1. To introduce the lesson, display the simple interest and compound interest tables included on the 1st tab of the Exploring Simple Interest and Compound Interest attachment for students to see. Allow students time to “notice and wonder” about each type of interest. Be careful not to reveal or go too much into how to calculate each type of interest as students will figure this out during the next activity. The following questions may be used to facilitate discussion:

  • What do you notice?
  • How are the tables similar? How are they different?
  • Why do you think the interest due is different?
  • Which type of interest do you think is best? Explain.
  • Does your answer change if you think about it from the perspective of the lender vs. the borrower?
  • What do you wonder?

  2. Explain to students that they will explore each type of interest by manipulating spreadsheet data to see the effects of each type of interest given different interest rates and principal amounts. Communicate to students that they will only be able to change the principal amount and interest rate for year 1 in both tables.

  • Make sure each student has a computer with spreadsheet software. Share the Exploring Simple Interest and Compound Interest attachment with each student. Remind students that they are working in the 1st tab titled "Simple vs. Compound Interest" and will only be able to change the principal amount and interest rate for year 1 in both tables.
  • Allow students time to manipulate the spreadsheet by changing values (See Teacher Notes). Encourage students to reflect on the changes they make. The following questions can be used to facilitate discussions with students individually, in small groups, or as a whole class:
    1. How are the values in the tables affected when the principal amount is changed?
    2. Are your observations true for any principal amount entered? Explain
    3. How are the values in the tables affected when the interest rate percentage is changed?
    4. Are your observations true for any interest percentage entered? Explain.
    5. Based on the changes you’ve made and observed, how would you define simple interest?
    6. Based on the changes you’ve made and observed, how would you define compound interest?

  3. Explain to students that they will format the 2nd tab of the spreadsheet titled “You Try!” to accurately calculate simple interest and compound interest using their understanding gained from exploring the “Simple vs. Compound Interest” tab of the spreadsheet. Students are free to choose any principal amount and interest rate percentage to format their spreadsheets.

  • If needed, review how to enter a formula with students. Formulas can be entered by 1st typing the equal sign into a cell then students can click cells, type the cell location, name the specific function (sum, average, count, etc.), and enter mathematical operations to create a formula depending on what they want to be calculated.
  • Allow students time to format their spreadsheets. While students are working, visit students individually or in small groups to monitor progress, answer questions, and provide assistance, as needed.
  • If students are struggling to format the cells, encourage them to use the 1st tab of the spreadsheet as a guide; students can use those same values and adjust their formulas as needed until they produce the correct values.
  • Once students finish, have them share and compare spreadsheets with each other. Be sure students are discussing the different values used and how the spreadsheet might be useful to someone comparing simple interest and compound interest.

  4. To bring the lesson to a close, use the guiding questions to facilitate a discussion that summarizes and reflects on the lesson.

• Teacher Notes

  
  
  • The spreadsheet attachment is locked to prevent students from viewing and editing the formulas. To unlock the spreadsheet and edit it as needed for students, enter the password “cpalms”.
  • Students can use the Comparing Simple and Compound Interest attachment to track the values they use in the spreadsheet.
  • To ensure students have prior knowledge of calculating percentages in context, students may complete the original student tutorial Estimating Tax and Tip (Resource ID#194107) before completing this lesson.
  • If teaching this lesson within a unit focused on credit, Types of Loans can be taught as the first lesson to give students background knowledge of loans and interest.

• Optional

  
  

  Formative Assessment Ideas:

  • Students can save and share their finished spreadsheets with the teacher to be checked for accuracy and correct use of formulas.

  Accommodation Suggestions:

  • If students need support formatting cells, allow them to use a calculator to calculate the values by hand first. Students can then use the same operations performed with the calculator to format the cells correctly.

  Extension Ideas:

  • For students ready to explore generalizing repeated calculations like the ones used to calculate simple interest and compound interest, they can try to create an equation that models simple interest and compound interest. Students can use calculators and/or spreadsheet software to verify their equations are correct.
  • If students are familiar with formatting cells in spreadsheet software or students finish formatting their cells earlier than the rest of the class, students can include more than 3 years in their tables.