Description - Compound Interest: How Does Money Grow Over Time?

This lesson will help you understand the effects of compound interests on investments, and how investments grow in relationship to interest and time (compound interest).

Objectives
After this activity you need to be able to…
  • Define compound interest and explain the effect of compounding interest.
  • Investigate various investment and saving opportunities.
  • Define and demonstrate comprehension of the following terms: saving, investing, rule of 72, compound interest, and diversification.

Task
Part 1: Using the following table, copying it onto your team's wiki site, determine the value of a $1,000 investment after three years when interest compounds annually. Use the supplied interest rates to compute values. (Round to the nearest whole number. Show your work.)
Example:
  • Year 1: $1,000 x 3% (.03) = 30 + 1000 = 1,030
  • Year2: 1,030x.03=31+1,030=1,061
    Year 3: 1, 061 x .03= 1,061 = 1,093
  • (Three year total value) Years to double: 72 divided by 3 =24.
Amount Invested
Interest Rate
Three Year Total Value
Years to Double (Rule of 72)
$1000
3%


$1000
5%


$1000
8%


$1000
10%



Part 2: Using the following table, determine the value of a $1,000 investment after three years, 5, 10, and 15 years when the interest rate remains the same.

Amount Invested
Interest Rate
Length of Investment
Amount Earned
$1000
6%
3 yrs

$1000
6%
5 yrs

$1000
6%
10 yrs

$1000
6%
15 yrs


Assessment
Be able to discuss in small group discussion the knowledge you individually gained.