Comparing Simple Interest and 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.
  • 02.01 Apply the following tools to increase work efficiency: word processing, database, spreadsheet programs, presentation programs, email systems, and the internet.
  • 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:

  • 01.02 Describe and use current and emerging technology and software to perform personal and business-related tasks.
  • SS.8.FL.3.2 Explain that, for the saver, an interest rate is the price of a financial institution pays for using a saver’s money and is normally expressed as an annual percentage of the amount saved.
  • SS.8.FL.3.4 Explain that, when interest rates increase, people earn more on their savings grow more quickly.
  • 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:

  • Calculate and compare simple interest and compound interest.
  • Analyze scenarios to explore how each type of interest affects borrowing money.
  • Analyze scenarios to explore how each type of interest affects saving money.
  • Format cells in a spreadsheet 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
  • The difference between simple interest and compound interest

• Guiding Questions

  
  
  • Which type of interest (simple or compound) is best for consumers?
  • Which type of interest (simple or compound) is best for financial institutions?

• Procedure

  
  

  1. To introduce the lesson, ask students to think about the following scenario: Pretend you own a business and you want to buy materials in bulk. Would you rather have a 15% discount or $15 off of your bulk purchase? Let students know there is no correct answer. Allow students to think about each option and perform any calculations if needed. The following questions can be used to facilitate discussion:

  • How are the discounts similar? How are they different?
  • What other information is important to know before choosing a discount?
  • Which discount do you think is best? Explain.
  • Is there a particular price that makes each discount equivalent? How do you know
  • What do you wonder?

  Conclude the discussion and remind students that sometimes, to make an informed decision, we need more information and/or we need to perform calculations to ensure what we think is a good option actually is.

  2. Review simple interest and compound interest with students and try to make connections between these types of interest and the discount question used to introduce the lesson. Remind students that compound interest “pays interest on interest” while simple interest only considers the principal amount. The following questions can be used to facilitate discussion:

  • How are principal and interest used to calculate simple interest?
  • How are principal and interest used to calculate compound interest?
  • Is one type of interest preferable to the other? Explain why or why not.

  3. Explain to students that they will be given two scenarios, one for saving money and one for borrowing money, and will decide if simple interest or compound interest is preferred.

  • Pass out a copy of the PJE Interest handout to each student. Briefly explain the structure of the handout; students are going to take a position (P), create and manipulate data using spreadsheet software to justify (J) their position, and use specific examples and/or data from the spreadsheet as evidence (E) to support their reasoning.
  • Ensure each student also has a computer with spreadsheet software. Remind students that they should format their spreadsheet to perform calculations that can be used to help them make sense of and answer the PJE questions. At a minimum, students should include columns for years, principal, interest rate, and interest due. Additionally, students should have sums to calculate the total interest due and the total value of the account (loan or savings).
  • Allow students to create their spreadsheet and complete the PJE Interest handout. While students are working, visit students individually or in small groups to monitor progress, provide assistance, and answer any questions. Encourage students to calculate the interest accrued over at least 10 years to visually see and understand the impact of each type of interest over time.

  4. Once students finish their handouts, place students in small groups to compare and discuss their work and reasoning for choosing each type of interest for each scenario. Remind students that there is no correct answer choice so they should not change their answers if they chose a different interest for each situation. The following questions can be used to facilitate discussion:

  • If you chose the same type of interest, how are your justifications similar? How are they different?
  • If you chose different types of interest, how do your justifications and evidence differ?
  • Is there a certain amount of time that makes one interest “better” than the other?
  • How does borrowing or saving money affect your choice of interest type?
  • If you owned a financial institution, which type of interest would you prefer if saving money? Why?
  • If you owned a financial institution, which type of interest would you prefer if you were lending money? Why?
  • To make an informed decision, what other information would you need to know aside from the type of interest and interest rate percentage?

  5. To bring the lesson to a close, have students reflect on what they have learned by responding to a journal prompt.

  • How do borrowing and saving money influence what you consider the most preferable type of interest?

• Teacher Notes

  
  
  • It is implied that students will use annual compounding for calculating interest. However, allow students to use different compounding periods (daily, monthly, quarterly, etc.) if they know how to format the cells correctly.
  • If teaching this lesson within a unit focused on credit, the Simple Interest vs. Compound Interest lesson (Resource #206489) can be taught prior to this lesson to give students background knowledge of each type of interest as well as experience with creating and formatting a spreadsheet.
  • Instead of using the journal prompt to close the lesson, students can revisit the opening question and revise their answers using calculations to support their reasoning.

• 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:

  • Instead of requiring students to use formulas, allow students to manually calculate the values and simply enter them into the spreadsheet.

  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.