Lesson 6

Topic: Simple Interest – What is it and how is it calculated? (45-60 min)

Goal: For students to learn about the concept of interest, earning money on money, and learning how basic interest is calculated.

Lesson Overview:

· Class discussion – What do they know about interest?

· Video – Middle School Money Matters Video 6-6 , Simple Interest

· Math Lesson – Calculating Simple Interest

· Paper activity – Calculating interest paid (on loans) and interest received (on investments)

· Review discussion

· Wrap-up or Extension activity

Class Discussion: Introduction to the concept of interest. The idea of interest has been mentioned in previous lessons, but perhaps not fully explained. Ask the class – What is interest? Have them explain in their own words what it is. Is interest a good thing? Why do we need interest? How is interest calculated?

Background Information/Lesson Material: Interest is an amount of money either earned or paid. If you deposit money in a Term Deposit at a bank they will pay you interest for leaving that money in the bank. If you borrow money from a bank in the form of a loan, it will then be you who pays interest to the bank. In either case simple interest is calculated in much the same way regardless whether you are depositing or borrowing money. Interest is the cost of borrowing money, whether it is the bank borrowing it from you, or you borrowing it from the bank.

Interest rates are generally given as annual rates – the amount of interest earned or paid in a year. Students may have seen the term APR referred to in car commercials, this stands for Annual Percentage Rate and refers to the interest rate a person would be charged if they decided to ‘finance’ the car purchase, meaning they are borrowing the money from the dealer in order to make the purchase and paying the dealer monthly payments which include payback of the principal (the amount borrowed) and some interest with each payment.

Today, students will just be learning about simple interest and a single year time frame.

Calculating Interest:

If students do no already know how to represent a percentage as a decimal, this may necessitate a lesson to cover this first. Interest is calculated by taking the principal amount and multiplying it by the decimal equivalent of the interest rate percentage. Students must first know how to convert the percentage into a decimal. Any percentage rate given (for interest) will be a decimal between 0 and 1.

Example: 10% interest = 0.1

7% interest = 0.07

2.5% interest = 0.025

To calculate the interest paid of earned, we simply multiply the principal amount by the decimal equivalent of the percentage.

Example:

1. A 1 year loan for $10,000 with an interest rate of 8%. The interest payable at the end of the year would be:

10,000 x 0.08 = 800 the interest payable on this loan would be $800

2. A 1 year GIC pays 2.3%, you deposit $2000 into the investment. How much is earned?

2000 x 0.023 = 46 after 1 year the GIC will pay out $46 in interest.

Video: Middle School Money Matters video 6-6 Calculating Simple Interest

Paper Activity/Worksheet – Calculating simple interest

After the lesson and video, have students complete the simple math problems on the supplied worksheet and review the answers in class.

Review Discussion: What do students think about the concept of interest? Should people just be able to earn money on their money without actually having to do anything? How might this contribute to the widening gap between the rich and poor?

Extension Ideas: This can easily lead into a conversation/lesson about compound interest which can be covered now, but is also shown in a future grade 8 lesson.

Have students look up rates of interest for different banking products (loans, mortgages, GICs, what do they notice? Have them look up Canadian regulations about loan interest rates and loan sharking. What is considered loan sharking? Look up PayDay loan businesses and have a discussion about their lending practices.