ACTIVITY A

Compound Interest

NO TES

Directions: Write down the following definitions.

Principal:
The amount of money upon which interest is paid.

Interest Rate:
In savings, an interest rate is the price a financial institution pays for using a saver’s money
and is normally expressed as an annual percentage of the amount saved.

Simple Interest:
Simple interest is earned on the principal amount only.

Compound Interest:
Compound interest is earned on the principal amount plus the interest already earned.

Source: Council for Economic Education

EXAMPLE
Simple Interest Compound Interest
Initial deposit $100 +$5.00 $100.00 +$5.00

after 1 year $105 +$5.00 $105.00 +$5.25

after 2 years $110 +$5.00 $110.25 +$5.51

after 3 years $115 +$5.00 $115.76 +$5.79

after 4 years $120 +$5.00 $121.55 +$6.08

after 5 years $125 $127.63

same amount increasing

of interest every year amount of interest
every year
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ACTIVITY
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Compound Interest
B
GRAP H 1: SIMPL E INTERES T VS. COMPOUN D INTERES T

BLIPPY EINSTEIN
Initial deposit: $100 Initial deposit: $100
Additional annual contribution: $0 Additional annual contribution: $0
Interest rate: 5% simple interest Interest rate: 5% compound interest
(compounding period not applicable) Interest compounds annually
Years to grow: 30 Years to grow: 30

500
TOTAL VALUE OF INVESTMENT ($)

$432.19
400

300

$250.00
200

100

0
0 5 10 15 20 25 30

TIME (YEARS)

GUIDIN G QUESTION S

• What’s the difference between Blippy’s investment and Einstein’s investment?

• Whose investment earned more interest after 30 years?
• How does the shape of Einstein’s graph differ from Blippy’s graph? Why do you think that is?
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ACTIVITY
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Compound Interest
B
GRAP H 2: SIMPL E INTERES T VS. COMPOUN D INTERES T

BLIPPY EINSTEIN
Initial deposit: $100 Initial deposit: $100
Additional annual contribution: $0 Additional annual contribution: $0
Interest rate: 6% simple interest Interest rate: 5% compound interest
(compounding period not applicable) Interest compounds annually
Years to grow: 30 Years to grow: 30

GUIDIN G QUESTION S

• What’s the difference between Blippy’s investment and Einstein’s investment?

• Whose investment earned more interest after 30 years?
• How does the shape of Einstein’s graph differ from Blippy’s graph? Why do you think that is?
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Compound Interest
B
GRAP H 2: COMPOUNDIN G PERIO D

BLIPPY EINSTEIN
Initial deposit: $100 Initial deposit: $100
Additional annual contribution: $0 Additional annual contribution: $0
Interest rate: 5% Interest rate: 5%
Interest compounds annually Interest compounds monthly
Years to grow: 30 Years to grow: 30

500
TOTAL VALUE OF INVESTMENT ($)

400

300

200

100

0
0 5 10 15 20 25 30

TIME (YEARS)

GUIDIN G QUESTION S

• What’s the difference between Blippy’s investment and Einstein’s investment?

• Whose investment earned more interest?
• What do you think would happen if Blippy’s investment compounded weekly instead of annually?
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Compound Interest
B
G R A P H 3 : S P E N D I N G TH E I N T E R E S T

BLIPPY EINSTEIN
Initial deposit: $1,000 Initial deposit: $1,000
Additional annual contribution: $0 Additional annual contribution: $0
Interest rate: 5% Interest rate: 5%
Interest compounds annually Interest compounds annually
Years to grow: 30 Years to grow: 30
Blippy spends half of his interest each year Einstein leaves his investment alone
Represents how much Blippy spends each
year

5000
TOTAL VALUE OF INVESTMENT ($)

$4,321.94
4000
Blippy withdrew a total of
$1,097.33 over 30 years.

3000

2000 $2,147.25

1000

0
5 10 15 20 25 30

TIME (YEARS)

GUIDIN G QUESTION S

• What did Blippy do differently than Einstein?

• If you add the amount of money Blippy spent to the total value of his investment after 30 years, is
it equal to the total value of Einstein’s investment? Why or why not?
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Compound Interest
B
G R A P H 4 : I N T E R E S T RA T E

BLIPPY EINSTEIN
Initial deposit: $1,000 Initial deposit: $1,000
Additional annual contribution: $0 Additional annual contribution: $0
Interest rate: 5% Interest rate: 7%
Interest compounds annually Interest compounds annually
Years to grow: 30 Years to grow: 30

8000

$7,612.26
TOTAL VALUE OF INVESTMENT ($)

7000

6000

5000

4000 $4,321.94

3000

2000

1000

0
5 10 15 20 25 30

TIME (YEARS)

GUIDIN G QUESTION S

• What’s the difference between Blippy’s investment and Einstein’s investment?

• Whose investment earned more interest after 30 years?
• What effect does the interest rate have on compound interest?
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Compound Interest
B
G R A P H 5 : ST A R T I N G E A R L Y

BLIPPY EINSTEIN
Initial deposit: $1,000 Initial deposit: $1,000
Additional annual contribution: $1,200 Additional annual contribution: $1,200
Interest rate: 5% Interest rate: 5%
Interest compounds annually Interest compounds annually
Years to grow: 20 Years to grow: 30

100000

Einstein gets a 10-year head start

TOTAL VALUE OF INVESTMENT ($)

80000

Blippy starts saving 10 years after Einstein

60000

40000

20000

0
0 5 10 15 20 25 30

TIME (YEARS)

Blippy earned a total of $17,332 in interest and Einstein earned a total of $47,048 in interest

GUIDIN G QUESTION S

• What did Einstein do differently than Blippy?

• Whose investment earned more interest at the 30-year mark?
• Who contributed the most money toward their investment?
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Compound Interest
B
G R A P H 6 : ST A R T I N G E A R L Y AN D C O N T R I B U T I N G L E S S

BLIPPY EINSTEIN
Initial deposit: $1,000 Initial deposit: $1,000
Additional annual contribution: $1,200 Additional annual contribution: $1,200
Contributes for 20 years Contributes for the first 10 years
Contributes $24,000 total only Contributes $12,000 total
Interest rate: 5% Interest rate: 5%
Interest compounds annually Interest compounds annually
Years to grow: 20 Years to grow: 30

Einstein gets a 10-year head start

50000
Blippy starts saving 10 years after Einstein
TOTAL VALUE OF INVESTMENT ($)

40000
Einstein stops making annual
contributions to his
investment
30000

20000

10000

0
0 5 10 15 20 25 30

TIME (YEARS)

GUIDIN G QUESTION S

• What did Einstein do differently than Blippy?

• Whose investment was worth more at the 30-year mark? Who paid more money into their investment?
• Why is it important to start saving as early as possible?
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Compound Interest
B
W O R K S H E E T — G R A P H A N A L Y SI S

Directions: Interpret the provided graph in order to answer the questions below.
Be prepared to present your findings to the class.

GRAPH #: FACTOR:

What conclusion did you reach? Is this factor under your

control?

What can you do to influence this factor in a What can you do to influence this factor in a
positive way (increase interest earnings)? negative way (decrease interest earnings)?

NO TE S