Mastering Compound Interest
This lesson covers the concept of compound interest, where interest is calculated on the principal and the accumulated interest from previous periods. Students will learn to use the power-based formula for efficiency.
Learning objectives
- Understand the difference between simple and compound interest.
- Use a decimal multiplier to calculate the value of an investment or loan after multiple years.
- Apply the compound interest formula $Original \times Multiplier^n$ to solve real-life financial problems.
- Compare different financial products to determine the best investment outcome.
Lesson plan (60 minutes)
Introduction · 10 min
Starter: Review simple interest vs adding percentages. Recall how to turn a percentage into a decimal multiplier.
Teaching · 15 min
Teacher-led explanation: Introducing the compound interest formula and the concept of 'interest on interest'. Work through one example on the board.
Main Activity · 20 min
Differentiated Worksheets: Students work through Support, Core, or Stretch tasks based on prior attainment. Teacher circulates for support.
Plenary · 10 min
Multiple Choice Quiz: Quick assessment of understanding and identification of remaining misconceptions.
Closure · 5 min
Reviewing quiz answers and self-reflection on lesson objectives.
Key vocabulary
- Principal
- The initial amount of money invested or borrowed.
- Compound Interest
- Interest calculated on both the principal and the interest accumulated from previous periods.
- Multiplier
- A number used to increase or decrease a value by a percentage (e.g., 1.04 for a 4% increase).
- Simple Interest
- A fixed amount of interest paid on the original principal only.
- Per Annum (p.a.)
- Per year (e.g., 5% interest p.a.).
Core worksheet (first questions)
- Calculate the total value of £2,000 invested for 3 years at 5% compound interest p.a.
- A car increases in value (classic car) by 6% each year. If it costs £5,000, what is it worth after 3 years?
- Invest £12,500 for 5 years at 3.25% compound interest. Calculate the final balance.
- Calculate the interest earned on £500 invested at 4% compound interest for 5 years. (Total - Original). Wait, calculate final balance.
Quiz (sample)
1. What is the decimal multiplier for an increase of 5%?
- A. 1.5
- B. 1.05
- C. 1.50
- D. 1.005
2. If £1,000 is invested at 10% compound interest for 2 years, what is the final balance?
- A. £1,100
- B. £1,200
- C. £1,210
- D. £1,220
3. In the formula P x (multiplier)^n, what does 'n' represent?
- A. It represents the number of years.
- B. It represents the interest rate.
- C. It represents the starting amount.
- D. It represents the multiplier.
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