Online Lesson Plan
Interest Rates
Lesson Plan by Kathy Jacobitz, science education consultant, Pawnee City, Nebraska.
Objectives
Suggested grade level – 5th-8th.
Students will calculate the interest on a loan based on a percentage rate.- Students will explore different types of interest rates.
- Students will investigate the history of interest charges on borrowed money.
- Students will relate what they learn about interest rates on a loan to the cost over a ten-year period.
Introduction
Loan Interest Rates
The depression of the 1930s impacted many individuals. Jobs were lost, banks failures increased, savings were lost, and people could not meet rent or mortgage payments. Many farm families had to rent their land or risk losing it all together if they could not pay the interest on their land loans.
Banks had made loans to a large number of people who could not repay what they owed. The money at some banks was gone due in part to the fact the banks tried to pay the depositors who wanted to withdraw their deposits. The lesson learned led to the development of the Federal Deposit Insurance Corporation, which now insures the money we deposit up to a maximum amount.
Interest is the price paid to banks (lenders) for the use of their money. Interest is figured as a percentage of the amount borrowed. Example: An individual goes to a bank and is charged 8% interest would pay $8.00 a year in interest for every $100.00 of the loan. Banks make money by paying a depositor a lower interest rate than rate to those getting a loan. The depositor receives money from the bank while the borrower pays the bank money and the bank gets to keep the difference to make a profit from the loan.
The most common types of interest are:
(1) Simple
(2) Compound
(3) Discount
Simple interest is paid on the amount of money borrowed (principal). A person who borrows $1,000.00 for a year at 10% interest rate would pay $100.00; 10% of $1000.00 = $100.00.
Compound interest is calculated on the amount borrowed (principal) and the accumulated interest. Using the above amount for a $1,000.00 loan the borrower would pay $110.00 interest or 10% of $1,100.00; $1,000.00 + $100.00 = $1,100.00 and 10% of $1,100.00 = $110.00.
Discount interest on a loan is subtracted from the $1,000.00 loan (principal) before the borrower receives the money. $1,000.00 – $100.00 = $900.00 however, the borrower would still have to repay $1,000.00. Calculates interest rate would be 11.11%, a slightly higher rate of interest than the other two types of interest.
Interest rates vary depending on the type of loan and lending rates. The length of loans impact the interest rate charged to individuals who apply for a loan. Interest rates are usually lower for short-term loans (a year or less) and more for long-term loans (5 or more years).
The degree of risk can also influence the rate the borrower pays for a loan.
The history of interest on money is very interesting. In Biblical times all payments for the use of money were forbidden. During The Middle Ages, it was a sin to charge for the use of money, punishable by being whipped, deprived of possessions and/or even being banished from the church. In 1545, King Henry VIII of England changed his nation’s laws to allow some forms of interest to be collected by the loaner. By the 1700s charging interest had become acceptable business practice for the loaning of money.
Resources
Links from within the Wessels Living History Farm site. [Note that clicking on these links will open a new browser window. Just close it and you’ll be back to this page.] Direct the students to these pages to learn about the banks and foreclosures.
Books include:
- The Money Lenders: Bankers and a World in Turmoil by Anthony Sampson.
- Banks are Dangerous to Your Wealth by Carol S. Greenwald.
- The Great Crash by John K. Galbraith.
- The Crash of ’29 and the New Deal by Bruce Glassman.
- The Great Depression: America by Robert S. McElvaine.
Problem/Question:
Compare and contrast simple and compounded interest for the following loan at a rate of 10% over a ten-year period of time for a $10,000.00 loan.
Perform a KWL – What We Know / What We Want to Know / What we Learned – about loans and interest rates in the journal and then compile a class KWL. Click here for a KWL chart example.
Calculate the interest for each type of loan for each year and prepare a graph to show your results. Then explain your results.
Which type of interest would you like to use if you are the borrower?
Which type of interest would you like to use if you were the banker?
Show all of your calculations for the above problem in your journal.
Questions:
- What are prime interest rates?
- What are discount interest rates?
- What are federal fund rates?
- How are interest rates regulated today?
- Research the history of interest.
- Why do interest rates vary?
- How does inflation impact interest rate?
- What were the interest rates on loans during the 1930s?
- What is collateral for a loan?
- Interview a bank loan officer about loans and report to the class.
- What is a mortgage?
- In the 1930s you are going to buy your first tractor and you need to borrow the money. What will the tractor cost and how much interest will you pay over a five-year loan.
Perform a post KWL for the journal and then a class KWL.
Assessment Activity
Ask students to investigate the cost of any tractor they want to buy and calculate a loan on the equipment. What would they pay for the tractor if the loan were for five years? What interest would they pay? How would the interest be calculated?
The 1920s price of a tractor was between $1,000.00 and $2,000.00. But by the middle of the depression, prices had come down, due to better manufacturing and because of deflation. Ask the students to explain why the cost of a tractor would go down and in the process they should explain deflation.
LeRoy Hankel reported in an interview that most tractors sold in 1935 ranged from a Model A for $700.00 to a Model B for a little over $500.00. According to Harvey Pickrel he paid $575.00 for a tractor in 1939. Many times the farmers sold their horses and used the money as a down payment on the tractor.
Students need to locate a picture of tractor they plan to purchase. A general discussion of the selling points for the tractor should be made into a newspaper ad for the tractor.
Research the history of the tractor and record the information in the journal.
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