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Investigation: Comparisons of simple and compound interest

Lesson

Objective

Compare simple interest and compound interest

Vocabulary

Define each of the terms below.  Be sure to use these terms when discussing the activity below with your classmates.

  • Interest:
  • Simple interest:
  • Compound interest:
  • Interest rate:

 

Discussion questions

The two tables below demonstrate how to calculate simple interest and compound interest.  Complete the tables to determine the total interest earned and the ending balance after five-years, with an initial deposit of $100.  

Simple Interest
Year Amount to Earn Interest Interest Rate Interest Earned Ending Balance
1 $100 5% (100)x(.05) = $5.00 $100
2 $100 5%    
3   5%    
4   5%    
5   5%    
Total        
Compound interest (truncate after the hundredths place
Year Amount to Earn Interest Interest Rate Interest Earned Ending Balance
1 $100 5% (100)x(.05)=$5.00 $105
2 $105 5%    
3   5%    
4   5%    
5   5%    
Total        

In words write a comparison of simple interest and compound interest, then discuss your reasoning with a partner (using the tables you completed and the vocabulary terms listed above).

Outcomes

F.LE.A.1

Distinguish between situations that can be modeled with linear functions and with exponential functions.

F.LE.A.1.A

Prove that linear functions grow by equal differences over equal intervals, and that exponential functions grow by equal factors over equal intervals.

F.LE.A.1.B

Recognize situations in which one quantity changes at a constant rate per unit interval relative to another.

F.LE.A.1.C

Recognize situations in which a quantity grows or decays by a constant percent rate per unit interval relative to another.

F.LE.A.3'

Observe using graphs and tables that a quantity increasing exponentially eventually exceeds a quantity increasing linearly, quadratically, or (more generally) as a polynomial function. 'Linear and exponential

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