Minds On

Lending and borrowing

Imagine that you want to borrow $50 from a friend. The money that your friend originally loaned you is called the principal. The friend needs that money back in one month from now. How should your friend be compensated for lending you $50?

A hand is taking $50 from a wallet.

Student Success

Think-Pair-Share

If possible, share your ideas with a partner.

Note to teachers: See your teacher guide for collaboration tools, ideas and suggestions.

Action

Exploring bank account features

Woman outside of a bank using a bank machine.

Banks are often in the scenario that we just discussed. A bank is an example of a financial institution. One of the activities they do is to take deposits and keep people’s money. They pay people interest on the money to compensate them for depositing the money into their bank. Sometimes they lend money to individuals. To be compensated for this, they will charge interest (think of it as a “fee” they charge to lend the money).

In a bank account (a chequing or a savings account), individuals deposit money and earn money on their deposits. When needed, they can withdraw money to use. If they pay using their debit card, the money will leave the account immediately.

With a credit card, an individual can charge purchases to their credit card and pay for them later. As they buy more items with their credit card, the cost of the purchases is added to their monthly bill. People can access a credit card statement each month that shows how much money they spent and the amount they spent on each item. The credit card statement also includes a date that the bill needs to be paid by. If the person does not pay by that date, they will be charged interest until they pay it off.

The principal is the amount of money borrowed, while interest is what the lender (e.g., a bank) charges an individual to borrow the money. For example, if you borrowed $100 from the bank with an interest of 1%, your principal is $100, and your interest is $1.

The interest rate is the proportion of the amount that you owe on top of the principal amount. You will be charged interest each month until the amount is paid off. That means that they will charge you a percentage of how much you owe or have spent. If you owe or spent a lot of money, the amount of interest charged will be higher. If you owe or spent a little amount of money, the amount of interest charged will be lower.

For example, the interest rate charged may be 5%. If a bill was $250.00, the 5% interest will equal $12.50 (0.05 × 250). If a bill is $25.00, the 5% interest will only be $1.25 (0.05 x 25).

Task 1: Paying your credit card bills on time

A baker in a small bakery selling or baking bread/cake

Scenario 1

This month, a baker’s credit card bill was $75.00. If they do not pay by the deadline, they will be charged interest at a rate of 1% per month. How much interest will they have to pay? How much will their bill be overall?

  • Step 1: turn 1% into a decimal
  • Step 2: multiply that decimal by the amount
  • Step 3: add the amount of interest paid to the amount of the bill

Press the ‘TVO Mathify' button to access this interactive whiteboard and the ‘Activity’ button for your note-taking document. You will need a TVO Mathify login to access this resource.

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Scenario 2

This month, the baker’s credit card bill was $1,080.00. If they do not pay by the deadline, they will be charged interest at a rate of 2.5% per month. How much interest will they have to pay? How much will their bill be overall?

Interest rates can be set per month or per year. You will be charged interest per month.

With a per month interest rate, if someone is late to paying their bill for two months, on the second month the same percentage will be applied to the whole bill − the first month of interest. Each month the interest charged will increase.

Scenario 3

Next month the baker’s credit card bill was $ 4,595.00. If they do not pay by the deadline, they will be charged an interest rate of 5%/month. How much interest will they have to pay? If they do not pay their bill for another month, how much interest will they pay this time?

  • Step 1: Turn 5% into a decimal
  • Step 2: Multiply that decimal by the amount. This is the answer to the first question
  • Step 3: Add together the interest (answer from step 2) and the credit card bill amount.
  • Step 4: Multiply the interest decimal by the amount from step 3.

Scenario 4

This year the baker’s credit card bill was $570. If they do not pay by the deadline, they will be charged an interest rate of 5%/year. How much interest will they have to pay? If they do not pay their bill for another year, how much interest will they pay this time?

Press the ‘TVO Mathify' button to access this interactive whiteboard and the ‘Activity’ button for your note-taking document. You will need a TVO Mathify login to access this resource.

TVO Mathify (Opens in new window) Activity (Open PDF in a new window)
A baker working on calculating his interest rates.

The baker is charged a yearly interest rate of 10%. How much interest do they pay each month? Use the steps above.

When the interest rate is charged by year, you need to convert it into a monthly interest rate. Take these steps:

  • Step 1: Convert the annual rate from a percent to a decimal by dividing by 100: 10/100 =
  • Step 2: Now divide that number by 12 to get the monthly interest rate in decimal form: (Blank)/12 =
  • Step 3: To calculate the monthly interest on $2,000, multiply that number by the total amount: (Blank) × $2,000 =(Blank) per month
  • Step 4: Convert the monthly rate in decimal format back to a percentage (by multiplying by 100): (Blank) × 100 =(Blank)
  • Step 5: Your monthly interest rate is 0.83%

The baker is charged a yearly interest rate of 10%. How much interest do they pay each month?

The baker is charged a yearly interest rate of 4.5%. How much interest do they pay each month? Use the steps above.

Press the ‘TVO Mathify' button to access this interactive whiteboard and the ‘Activity’ button for your note-taking document. You will need a TVO Mathify login to access this resource.

TVO Mathify (Opens in new window) Activity (Open PDF in a new window)

Task 2: Choosing a bank

Do you want a bank that charges a high interest rate or a low interest rate for late bills?

Choose the interest rate that appeals the most to you when choosing a bank.

10%/year
5%/month
5%/month
1%/month
6%/year

Explain your answer.

Task 3: Other Scenarios

We know banks charge interest for amounts that are borrowed on a credit card. The bank will charge interest whenever they loan money or funds to a client. Can you think of other times the bank may charge a client interest? Think of other products or services they may offer clients that would have an interest charge.

If possible, work with a partner to brainstorm examples using a method of your choice.

Consolidation

Task 1: Create your own word problem

Create your own word problem about charging interest.

In your word problem be sure to include:

  • the amount that the credit card bill is for
  • the interest rate
  • how long the credit card bill is not paid for
Student working on a computer with an adult supervising

Student Success

Think-Pair-Share

Use the information from your word problem to ask any questions.

If possible trade your question with a partner and try to answer it. You can correct each other’s work.

Note to teachers: See your teacher guide for collaboration tools, ideas and suggestions.

Task 2: Answer the questions

Brainstorm

Brainstorm

Answer the following questions:

  • Why do you think banks charge interest?
  • Is charging interest fair?
  • Why is it important for you to understand and calculate interest?

Reflection

As you read through these descriptions, which sentence best describes how you are feeling about your understanding of this learning activity? Press the button that is beside this sentence.

I feel...

Now, record your ideas using a voice recorder, speech-to-text, or writing tool.

Connect with a TVO Mathify tutor

Think of TVO Mathify as your own personalized math coach, here to support your learning at home. Press ‘TVO Mathify’ to connect with an Ontario Certified Teacher math tutor of your choice. You will need a TVO Mathify login to access this resource.

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