Let’s take a look at how interest is calculated and get a better sense of the difference between simple and compound interest.
In this activity, students develop and understanding of the difference between simple and compound interest. They learn how to compute the amount owed over different times with different interest rates and different frequencies of compounding. An Interest VI is used to underline the differences between compound and simple interest graphically and numerically. It is also used for calculations and for students to check their work.
Students will be able to:
• Articulate the differences between simple and compound interest.
• Calculate the amount owed over time with simple or compound interest.
Algebra: A.1, A.2, A.6
Math Models with Applications: 1A,B,C 2A,D 5A,C 7A
When money is borrowed, it is common for the borrower to pay interest, like a fee, until the debt is paid. Interest is paid on money borrowed for cars, homes, and for money spent on a credit card. Interest can be earned for putting money into a savings account or investing in the stock market. Interest is calculated as a percentage. Sometimes the interest is only based on the original amount borrowed, called the principle. In these cases, we call it simple interest. In other cases, interest is based not only on the principle, but also on any previously accumulated interest. This potentially snowballing scenario is called compound interest. It is common for interest to compound annually, quarterly, monthly and, in the case of credit cards, even daily.