Lesson Plan - Time Value of Money Course Title Money Matters Lesson Title Time Value of Money Specific Objective Explain the time value of money Performance Objectives: The learner will Discuss how saving contributes to financial well-being. Know and use simple interest and compound interest terminology. Discuss what simple interest and compound interest are. Understand when interest is paid. Understand when interest is earned. Know and use the formula for calculating simple interest. Algebraically manipulate the interest formula to solve for different variables. Present simple compound interest and use a table to show how it works. Explain the time value of money and how the longer the term the greater the rewards. Work through several examples of simple and compound interest with the class. Work through examples that solve for unknowns other than the total interest earned or total amount of the principal plus the interest. TEKS: 130.162.(c)(2)(E) Time required: 60 minutes instruction, 30 minutes of activities. Occupational Correlation (O*Net http://www.onetonline.org/) 43-3071.00 - Tellers Receive and pay out money. Keep records of money and negotiable instruments involved in a financial institution's various transactions. Sample of reported job titles: Teller, Customer Service Representative (CSR), Bank Teller, Member Services Representative, Account Representative, Customer Relationship Specialist, Customer Service Associate (CSA), Personal Banking Representative, Roving Teller, Teller Coordinator Tasks Cash checks and pay out money after verifying that signatures are correct, that written and numerical amounts agree, and that accounts have sufficient funds. Receive checks and cash for deposit, verify amounts, and check accuracy of deposit slips. Enter customers' transactions into computers to record transactions and issue computer-generated receipts. Balance currency, coin, and checks in cash drawers at ends of shifts, and calculate daily transactions using computers, calculators, or adding machines. Examine checks for endorsements and verify other information such as dates, bank names, identification of the persons receiving payments and the legality of the documents. Count currency, coins, and checks received, by hand or using currencycounting machine, to prepare them for deposit or shipment to branch banks or 1
the Federal Reserve Bank. Order a supply of cash to meet daily needs. Receive and count daily inventories of cash, drafts, and travelers' checks. Prepare and verify cashier's checks. Sort and file deposit slips and checks. Preparation Materials Needed: Handouts of presentation with notes blanks for student notes 1 per student Calculators (basic 4-function) or calculator accessory program on computer Interest on Interest Extension Activity 1 per student Equipment Needed: Interactive whiteboard, dry erase board, poster or flip chart board or paper Computer with multimedia software and projection capabilities and equipment. Learner Preparation: Before you begin the multimedia presentation, say A bird in the hand is worth two in the bush ever heard that? What does it mean? (Write student responses on interactive whiteboard or dry erase board, etc., to bring students into discussion and validate their responses.) Ask does that work the same with money? Suppose someone owed you $300. Would you rather have this money paid back now, in one payment, or later in installment payments? Does it make any difference? (Begin multimedia presentation.) Teaching Strategies: Hook students into the lesson by validating their responses to your pre-lesson questions on an interactive or dry erase whiteboard, etc., and then move directly into discussion as you start and move through the multimedia presentation. Introduction: Key Terms (these and the others listed below and as discussed through the lesson presentation for a total of 17): bank a financial institution that provides various products and services to its customers, including checking and savings accounts, loans and currency exchange cash money in the form of paper currency or coins (as distinct from checks, money orders or credit) compound Interest earning interest on interest through reinvesting. The result of compounding compounding the process of leaving an initial investment plus accumulated interest in a bank for more than one period decision a conclusion reached after considering alternatives and their results future value cash value of an investment at a particular time in the future investing the process of putting money someplace with the intention of making a financial gain investment the amount of money invested in stocks, bonds, mutual funds and 2
other investment instruments money anything that is generally accepted as final payment for goods and services, serves as a medium of exchange, a store of value and a standard of value opportunity cost - the second-best alternative (or the value of that alternative) that must be given up when scarce resources are used for one purpose instead of another principal the original amount invested reinvesting leaving principal and adding the interest to an investment to accumulate interest. savings money set aside for a future use that is held in easily-accessed accounts, such as savings accounts and CDs savings account an interest-bearing account at a bank or other financial institution simple interest interest on an investment is not reinvested, so interest is earned each period on the original investment (principal) only trade-off - the giving up of one benefit or advantage in order to gain another regarded as more favorable. value of money the ability of money to buy goods and services. Assessment: Class participation in the discussion through the presentation Students will complete the reflective questions at the end of the presentation which will include a response based on given variables for evaluation of the best plan if someone owes them $300 for a daily grade. Additional Resources: Websites: "The Time Value of Money - Educator's Version." Econedlink, Council for Economic Education. Thinkfinity, n.d. Web. 14 June 2012. <www.econedlink.org/e865 >. 3
Introduction (LSI Quadrant I): Introduction Before you begin the multimedia presentation, say A bird in the hand is worth two in the bush ever heard that? What does it mean? (Write student responses on interactive whiteboard or dry erase board, etc. to bring students into discussion and validate their responses.) Ask does that work the same with money? Suppose someone owed you $300. Would you rather have this money paid back now, in one payment, or later in installment payments? Does it make any difference? (Begin multimedia presentation.) Outline (LSI Quadrant II): Outline Instructors can use the multimedia presentation, slides, handouts of presentation with notes blanks in conjunction with the following outline. MI Outline Notes to Instructor I. Introduction - A. A bird in the hand... B. Suppose someone owes you $300... Pose A bird in the hand... question. Begin multimedia presentation. Refer to Slide #1 II. Key Terms 1. Bank 2. Cash 3. Compound Interest 4. Compounding 5. Decision 6. Interest 7. Interest Rate 8. Investing 9. Investment 10. Money 11. Opportunity Cost 12. Principal 13. Reinvesting 14. Savings View slide #2 Key Terms refer to notes on slide for presentation idea... 4
15. Savings Account 16. Simple Interest 17. Trade-Off III. Some key terms: A. Define principal the original amount invested to which interest is applied. Point out to students that principal is indicated with P in the equation to figure interest a little later. View slide #3 Refer to the question posed in slide #1 If someone PAID you $300 and you invested it in something the $300 would be your principal. B. Define interest rate the percentage that is used to calculate interest expressed as a fraction or decimal. Refer to slide #4 notes C. Define time factor the length of time for which interest will be charged. Refer to slide #5 notes D. Define Simple Interest interest on an investment (if not reinvested), so interest is earned each period on the original investment (principal) only. Refer to slide #6 5
E. Formula for Simple Interest I = P x R x T Refer to slide #7 Have students highlight the formula for simple interest in their notes. F. Define Simple Interest - investing for a single period Refer to slide #7-10 notes Have students use calculators to figure the amount of interest in one year. G. Define 1. Reinvesting leaving principal and adding the interest to accumulate interest 2. Compounding the process of leaving an initial investment plus accumulated interest in a bank for more than one period 3. Compound Interest earning interest on interest through reinvesting Refer to slide #11-16 notes. 6
H. Define Future Value cash value of an investment at a particular time in the future Refer to slides #17-20 I. Define 1. opportunity cost - the second-best alternative (or the value of that alternative) that must be given up when scarce resources are used for one purpose instead of another. The cost of any decision includes the cost of the best forgone opportunity. 2. trade-off the giving up of one benefit or advantage in order to gain another regarded as more favorable. Refer to slid #21-24 3. What would YOU do? Given the principal amount, have students write a response to what they would do and why on paper and turn it in at the end of class. Refer to slide #25 7
J. Extension/Enrichment Interest on Interest handout Verbal Linguistic Logical Mathematical Visual Spatial Musical Rhythmic Guided Practice (LSI Quadrant III): Bodily Kinesthetic Intrapersonal Interpersonal Naturalist Existentialist As you teach the lesson, the slides contain various equations and questions based on the formula for simple interest and the concepts of compounded interest that students will have the opportunity to answer for themselves. The class will then have the opportunity to see the solutions and ask questions. Independent Practice (LSI Quadrant III): Have students refer to the questions posed on slide #25, and respond with at least two options for the $300 (and turn in at the end of class). Summary Review (LSI Quadrant I & IV): Group activity skits illustrating the functions of money Evaluation Informal Assessment (LS1 Quadrant III): Students will be assessed for involvement and participation in the lesson discussion through the presentation. Formal Assessment (LSI Quadrant III, IV): Students will be evaluated on their contribution, participation, and response to end-of-lesson questions about $300. Extension Extension/Enrichment (LSI Quadrant IV: Interest on Interest exercise to apply the principles of the lesson in the table, and encourage critical thinking in answering the last question about an employer s offer. 8
Name: Date: Period: Interest on Interest a. Suppose you locate a two-year investment that pays 14 percent per year. If you invest $325: How much will you have at the end of two years? How much of this is simple interest? How much is compound interest? b. Complete the Columns Below: End of Year Amount on Interest Interest Rate Interest Earned Balance 1 $1,000 10% $100 $1100 2 1,100 10% 3 10% 4 10% 5 10% 6 10% 7 10% 8 10% 9 10% 10 10% 11 10% 12 10% c. How many years did it take to double your money? d. Suppose you go in for an interview for a part-time job. The boss offers to pay you $50 a day for a 5-day, 10-week position OR you can earn only one cent on the first day but have your daily wage doubled every additional day you work. Which option would you take? (Answer on a separate piece of notebook paper.) 9
Interest on Interest - KEY a. Suppose you locate a two-year investment that pays 14 percent per year. If you invest $325: How much will you have at the end of two years? _$422.37 How much of this is simple interest? $97.37 How much is compound interest? $6.37 At the end of the first year, you will have $325 x (1 +.14) = $370.50. If you reinvested this entire amount, and thereby compound the interest, you will have $370.50 x 1.14 = $422.37 at the end of the second year. The total interest you earn is thus $422.37 -- 325 = $97.37. Your $325 original principal earns $325 x.14 = $45.50 in interest each year, for a two-year total of $91 in simple interest. The remaining $97.37 -- 91 = $6.37 results from compounding. How much will you have in the third year? b. Complete the Columns Below End of Year Amount on Interest Interest Rate Interest Earned Balance 1 $1,000 10% $100 $1100 2 1,100 10% [110] [1210] 3 [1,210] 10% [121] [1331] 4 [1,331] 10% [133.10] [1464.10] 5 [1,464.10] 10% [146.41] [1610.51] 6 [1,610.51] 10% [161.06] [1771.56] 7 [1,771.56] 10% [177.16] [1948.72] 8 [1,948.72] 10% [194.87] [2143.59] 9 [2,143.59] 10% [214.36] [2357.95] 10 [2,357.95] 10% [235.80] [2593.75] 11 [2,593.75] 10% [259.38] [2853.13] 12 [2,853.13] 10% [285.31] [3138.44] c. How many years did it take to double your money? [8] Suppose you go in for an interview for a part-time job. The boss offers to pay you $50 a day for a 5-day, 10-week position OR you can earn only one cent on the first day but have your daily wage doubled every additional day you work. Which option would you take? 10