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Chapter 1: Lesson 2 Activity
TEACHER’S MATERIAL
Interesting Interest
1/4
ACTIVITY
MATERIALS
Individual
Activity handout; calculator
15 MINUTES
OBJECTIVE
Students will compare the growth of money invested with simple interest to the growth of money
invested with compound interest
STANDARDS
Spending and Saving Standard 1: Develop a plan for spending and saving.
• Explain why saving is a prerequisite to investing.
Investing Standard 1: Explain how investing may build wealth and help meet financial goals.
• Given a rate of return and number or years, calculate the future value of a lump-sum investment.
PROCEDURE
1. Distribute the activity handout and point out the simple interest and compound interest
information.
2. Instruct students to follow the directions and complete the activity.
SIMPLE INTEREST
Simple interest is a quick way to compute interest on a principal investment—the total
amount of money invested. This is the mathematical formula to figure simple interest:
I = prt
I is simple interest, p is the principal amount, r is the interest rate,
and t is the number of years.
So, simple interest is calculated by multiplying the principal by the interest rate by the total
number of years. This formula provides the interest earned over the number of years input
into the formula. You would then add that figure to the initial principal amount.
Foundations in Personal Finance: Middle School Edition
Chapter 1
Chapter 1: Lesson 2 Activity
TEACHER’S MATERIAL
Interesting Interest
2/4
For example, a $100 principal investment at a simple annual interest rate of 10% would earn
$10 per year. Over five years, your investment would look like this:
$100 to start
$110 after one year
$120 after two years
$130 after three years
$140 after four years
$150 after five years
If you kept this going, how much would you have after:
Six years? $
160 Seven years? $
170 Eight years? $
180 Nine years? $
190 Ten years? $
200 COMPOUND INTEREST
Compound interest is a mathematical explosion that can help you make a lot of money. Each
year, the compounded interest impacts the total amount in the investment—both the principal
and the interest each year. That’s great news because you are also earning interest on your
interest! This is the mathematical formula for compound interest:
FV = PV(1+r/m)mt
FV is the future value with compound interest, PV is the present value based on the
principal amount, r is the interest rate expressed as a decimal, m is the number of times
per year the interest is compounded (monthly, annually, etc.), and t is the number of years/
periods you leave the money invested. This formula provides the actual future value.
Foundations in Personal Finance: Middle School Edition
Chapter 1
Chapter 1: Lesson 2 Activity
TEACHER’S MATERIAL
Interesting Interest
3/4
Using the same $100 principal investment and the same 10% interest rate as the simple
interest example, watch how monthly compounded interest impacts your investment:
$100 to start
$110 after one year
$122 after two years
$135 after three years
$149 after four years
$165 after five years
For this example, you are trying to determine Future Value (FV).
PV = $100 (the initial investment)
r = .10 (10% interest)
m = 12 (monthly compounding)
t = this will change to compute each year
So, the equation will look like this for the first five years:
$110 after one year: FV = 100(1+.10/12)12×1
$122 after two years: FV = 100(1+.10/12)12×2
$135 after three years: FV = 100(1+.10/12)12×3
$149 after four years: FV = 100(1+.10/12)12×4
$164 after five years: FV = 100(1+.10/12)12×5
This is best worked with a scientific calculator which allows you to input the correct formula.
Notes
The figure in the parentheses will remain the same (1+.10/12); for simplicity, you can use
the following figure: 1.008333.
The exponential number (mt) will need to be calculated separately and then inserted into
the equation. For the first five years, the numbers will be 12, 24, 36, 48, 60; then for years
6–10, the numbers will be 72, 84, 96, 108, 120.
The equation for year five looks like this FV=100(1.008333)60 and can be simplified
as 1.00833360 × 100.
Foundations in Personal Finance: Middle School Edition
Chapter 1
Chapter 1: Lesson 2 Activity
TEACHER’S MATERIAL
Interesting Interest
4/4
If you kept this going, how much would you have after:
Six years? $
182 Seven years? $
201 Eight years? $
222 Nine years? $
245 Ten years? $
271 Do you see how that works? So, after five years, you would have an additional $14 with
compound interest instead of simple interest. Now, an extra $14 may not seem like a big
deal. But if you go out twenty years, it would be $300 with simple interest but $732 with
compound interest. Pretty impressive, right? And it looks even better if you start with $1,000
or more. Try it out and see.
Foundations in Personal Finance: Middle School Edition
Chapter 1
Student Name:
Date:
Chapter 1: Lesson 2 Activity
Interesting Interest
1/3
SIMPLE INTEREST
Simple interest is a quick way to compute interest on a principal investment—the total
amount of money invested. This is the mathematical formula to figure simple interest:
I = prt
I is simple interest, p is the principal amount, r is the interest rate,
and t is the number of years.
So, simple interest is calculated by multiplying the principal by the interest rate by the total
number of years. This formula provides the interest earned over the number of years input
into the formula. You would then add that figure to the initial principal amount. For example,
a $100 principal investment at a simple annual interest rate of 10% would earn $10 per year.
Over five years, your investment would look like this:
$100 to start
$110 after one year
$120 after two years
$130 after three years
$140 after four years
$150 after five years
If you kept this going, how much would you have after:
Six years? $
Seven years? $
Eight years? $
Nine years? $
Ten years? $
Foundations in Personal Finance: Middle School Edition
Chapter 1
Chapter 1: Lesson 2 Activity
Interesting Interest
2/3
COMPOUND INTEREST
Compound interest is a mathematical explosion that can help you make a lot of money. Each
year, the compounded interest impacts the total amount in the investment—both the principal
and the interest each year. That’s great news because you are also earning interest on your
interest! This is the mathematical formula for compound interest:
FV = PV(1+r/m)mt
FV is the future value with compound interest, PV is the present value based on the
principal amount, r is the interest rate expressed as a decimal, m is the number of times
per year the interest is compounded (monthly, annually, etc.), and t is the number of years/
periods you leave the money invested. This formula provides the actual future value.
Using the same $100 principal investment and the same 10% interest rate as the simple
interest example, watch how monthly compounded interest impacts your investment:
$100 to start
$110 after one year
$122 after two years
$135 after three years
$149 after four years
$165 after five years
For this example, you are trying to determine Future Value (FV).
PV = $100 (the initial investment)
r = .10 (10% interest)
m = 12 (monthly compounding)
t = this will change to compute each year
So, the equation will look like this for the first five years:
$110 after one year: FV = 100(1+.10/12)12×1
$122 after two years: FV = 100(1+.10/12)12×2
$135 after three years: FV = 100(1+.10/12)12×3
$149 after four years: FV = 100(1+.10/12)12×4
$164 after five years: FV = 100(1+.10/12)12×5
This is best worked with a scientific calculator which allows you to input the correct formula.
Foundations in Personal Finance: Middle School Edition
Chapter 1
Chapter 1: Lesson 2 Activity
Interesting Interest
3/3
Notes
The figure in the parentheses will remain the same (1+.10/12); for simplicity, you can use
the following figure: 1.008333.
The exponential number (mt) will need to be calculated separately and then inserted into
the equation. For the first five years, the numbers will be 12, 24, 36, 48, 60; then for years
6–10, the numbers will be 72, 84, 96, 108, 120.
The equation for year five looks like this FV = 100(1.008333)60 and can be simplified
as 1.00833360 × 100.
If you kept this going, how much would you have after:
Six years? $
Seven years? $
Eight years? $
Nine years? $
Ten years? $
Do you see how that works? So, after five years, you would have an additional $14 with
compound interest instead of simple interest. Now, an extra $14 may not seem like a big
deal. But if you go out twenty years, it would be $300 with simple interest but $732 with
compound interest. Pretty impressive, right? And it looks even better if you start with $1,000
or more. Try it out and see.
Foundations in Personal Finance: Middle School Edition
Chapter 1