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How do banks calculate the amount of interest paid on a loan? In this lesson, students will view a Livescribe Pencast to learn how to find the dollar amount in interest that is due at maturity. This lesson uses different time periods such as days, months, and years in the calculation as well as varying interest rates.

### STUDENTS WILL

• Calculate simple interest on small loans.
• Convert the interest rate expressed in percent to a decimal.
• Express time as a ratio when time is expressed in days and months.
• Find the total amount due in dollars when the loan matures.

### INTRODUCTION

Suppose you want to get a loan to buy a car?  What would you want to know about the loan?  Would you want to know the amount of your monthly payments?  Would you want to know how much you would have to repay including interest?  In this lesson, students will learn how to calculate simple interest.

When banks use simple interest, they consider the principal, the interest rate, and the length of time of the loan.  Students will learn how banks calculate the amount in dollars to be repaid, when money is borrowed.

So, how do banks calculate the amount of interest paid on a loan? In this lesson, students will view a Livescribe Pencast and/or Youtube Video to learn how to find the dollar amount in interest that is due at maturity. This lesson uses different time periods such as days, months, and years in the calculation as well as varying interest rates.

### RESOURCES

• Simple Interest Worksheet: This activity is to be completed during step four of the Process section of the lesson.
Worksheet
Teacher Key

### PROCESS

1.Show students how to calculate simple interest using the formula: I=PRT. Explain that "P" is the Principal and is the amount you borrow; "R" is the Rate in percent; "T" is the Time in years.

2. Perform several problems with your students using various interest rates and time periods.

3. As a supplementary resource, show students this Simple Interest YouTube Video or view the Livescribe Pencast on the right (by clicking the "play" button) that contains the instruction the students will need to perform the calculations.

4.  Assign the Worksheet.

5. (Optional): Ask the students to complete the extension activity.

### ASSESSMENT ACTIVITY

Evaluate the Simple Interest Worksheet based on the number correct.

### CONCLUSION

In this lesson, your students have learned how to calculate simple interest.  This knowledge will help them make informed financial decisions when using credit.

As your class has seen, the higher the interest rate or the longer the time period of the loan, the higher the interest in dollars.  Students will find it wise to shop around for the best rate that will allow them to use the principal but make repayment easier.

### EXTENSION ACTIVITY

1. Have the students check the answers to the worksheet using the interest calculated on the EconEdLink website: Interest Calculator. (Note: Students will enter 6 months as ".5" since the time on the calculator is in years. They will have to make similar entries for days.)

2. Have the students inquire at their bank what the interest rate is on a home with a 30-year mortgage and have them report it to the class. Also, have the students inquire at their bank what the interest rate is on an automobile loan for three years and report it to the class. Make sure the students take in the proper mortgage and automobile loan situations to their bank, and have them record these rates on something that they can bring back to class.

## EDUCATOR REVIEWS

• “This lesson is on calculating simple interest. The video is easy to understand and students can refer to it if they need to. The worksheet is challenging enough for middle school with lots of experience on fractions. I recommend it.”

Pam B., Henrico, VA   POSTED ON April 9, 2012