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Junior and Senior level Ag Bus. | |Colorado Agriscience Curriculum

|Section: |Advanced Agribusiness |

|Unit: |Management of Agricultural Business Records |

|Lesson Title: |Computing interest |

|Colorado Ag Education | |

|Standards and Competencies |AGB11/12.03 - The student will be able to formulate and analyze financial records and use the information for |

| |evaluation and planning. |

| | |

| |Understand types of interest. |

| | |

|Colorado Model Content | |

|Standard(s): |Math Standard 1: Students develop number sense and use numbers and number relationships in problem-solving situations|

| |and communicate the reasoning used in solving these problems. |

| | |

| |Math Standard 2: Students use algebraic methods to explore, model, and describe patterns and functions involving |

| |numbers, shapes, data and graphs in problem-solving situations and communicate the reasoning used in solving these |

| |problems. |

| | |

| |Math Standard 6: Students link concepts and procedures as they develop and use computational techniques, including |

| |estimation, mental arithmetic, paper-and-pencil, calculators, and computers, in problem-solving situations and |

| |communicate the reasoning used in solving these problems. |

|Student Learning Objectives: |Objective 1: The student will calculate interest using the Simple interest method |

| |Objective 2: The student will calculate interest using the remaining balance method |

| |Objective 3: The student will calculate interest using the Add-On Method |

| | |

|Time |50 minutes |

|Resource(s): |Introduction to Agribusiness Ricketts 2001 |

| |Instructional Material Services ,Texas A&M |

|Instructions, Tools, |Italicized words are instructions to the teacher, normal style text is suggested script. |

|Equipment, and Supplies: |Create a “Knowbook” for each student prior to the start of the class period. Knowbooks can be made by taking 2 pieces|

| |of blank white paper and folding them together ‘hamburger’ style – effectively creating an 8-page booklet (if you |

| |count the cover and the back pages) |

| |Make Knowbooks available to each student prior to the beginning of the class period. |

| |Make colored pencils / markers / crayons available to the students – perhaps place them on a table at the front of the|

| |room |

| |Each student needs one version of the Student Handout Scenario (sheet is available at the end of the lesson plan). |

| |14 different scenarios are provided – if you have more than 14 students, make additional copies so that each student |

| |has a scenario. |

| |Before students enter the room put the following information on the chalkboard or overhead projector or Smart board – |

| |(a copy of this information is provided at the end of the lesson. |

| |The Agricultural Bank of America |

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| | |

| |Today loans are due on the John Deere Tractors that you purchased one year ago. |

| |Based on your credit rating, each of you was given a different interest rate at which we loaned you the money to |

| |purchase your tractor. |

| |Listed below are the interest rates at which 14 different tractor loans were given. |

| |Please look at your loan paperwork (given to you by your instructor). Come up to the board and write in the total |

| |interest you owe us, as well as the total amount you owe us. |

| | |

| |Interest Rate |

| |Total Interest Paid |

| |Total Amount Due |

| | |

| |4.5% |

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| |5.0% |

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| |5.5% |

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| |6.0% |

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| |6.5% |

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| |7.0% |

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| |7.5% |

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| |8.0% |

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| |8.5% |

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| |9.0% |

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| |9.5% |

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| |10.0% |

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| |15% |

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| |20% |

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|Interest Approach: |Good morning everyone! Each of you has a piece of paper you received upon entering the classroom this morning. The |

| |CEO of the Agricultural Bank of America has left a message for us on the board/overhead. When I say GET TO IT, please|

| |take a few minutes to read your scenarios as well as the message from the CEO. After you have read the information, |

| |please come up to the board and fill in your information. Do you have any questions? If so, please ask them now. If|

| |not, let’s GET TO IT! |

| |Assist the students in filling in the chart on the board / overhead. They will certainly have a few questions and |

| |comments – especially when they realize that the original loan was for $300,000 and some of them are paying $360,000 |

| |($60,000 in interest while others are only paying $13,500 in interest). |

| |After the students have returned to their seats, start the discussion: |

| |What do we notice about the information we’ve created on the board? Elicit responses |

| |Why are some borrowers only paying $13,500 in interest, while others are paying $46,500 more? Elicit Reponses |

| |How are interest rates determined? Elicit Reponses |

| |As you can see, interest cost can be a major expense to agricultural businesses and to those in production |

| |agriculture. |

| |Show PowerPoint #2: |

| |Does anyone know how interest costs are calculated? |

| |Elicit Responses |

| |Today we are going to delve into how interest rates are calculated and how a borrower can take out a loan on the same |

| |amount – let’s say $1000 – but depending on the loan type and the way interest is calculated the total amount due may |

| |vary. |

| |Cue up PowerPoint Slide #3 “Methods of Calculating Interest” |

| |These loan types include: Simple Interest, Remaining Balance, Add-On Method |

| |To get our brains jumpstarted, when I say COLOR, I’d like each of you to come up to the front of the room and get a |

| |Knowbook and some colored pencils / markers / crayons etc. Any questions? Great! COLOR! |

| |Now that everyone has a knowbook, I’d like you to take a few minutes and create a title on the cover page that |

| |corresponds with the title of the PowerPoint Slide you see on the screen right now (Cue up PowerPoint slide #4 – |

| |“Computing Interest”) |

| |After you’ve created your title – draw a quick picture of that title that’s meaningful for you. Make sure that the |

| |picture adequately represents the title to you. Your picture may be different from your neighbors; that’s OK – what’s|

| |important is that YOU know what your picture represents. |

| |Great work everyone! Make sure to list yourself as the ‘author’ of this Knowbook – you’ve got to get credit for the |

| |amazing work you’re going to create today! |

| |Fantastic – now that everyone’s finished their cover page – please open your books to the first two pages and prepare |

| |to be ‘amazed’ by the information we’re about to go over! |

|Objective 1: |Objective 1: The student will calculate interest using the Simple Interest Method |

| |Cue up Slide #5 |

| |As we review this information in class, take a few minutes to capture the information presented through lecture and |

| |the PowerPoint presentation in your Knowbook. Make sure to write the information down in a way that you can |

| |accurately remember it – draw pictures to accompany the information (if it helps you). |

| |The annual percentage rate (APR) of a loan can be calculated using several different methods. |

| |The method used will determine how much interest cost is paid by the business. |

| |Cue up Slide #6 |

| |The First method we will use is the Simple interest method. EXAMPLE |

| |$1000 borrowed for 1 year at 5% interest |

| |1000 x .05 = $50 interest charge |

| |SO $1050 would be paid back at the end of the one year loan - Period. |

|Objective 2: | |

| |Objective 2: The student will calculate interest using the Remaining Balance Method |

| |Cue up Slide #7 – Check to make sure the students are still keeping pace with their Knowbooks. Encourage them where |

| |appropriate. |

| |The second method of computing interest we will look at is the Remaining Balance Method. |

| |This method is used when several payments will be made to pay off the loan |

| |Interest is charged only on the remaining principal balance. |

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| |Cue up Slide #8 |

| |Example: $1000 borrowed for 4 years at 8% interest. The $1000 will be paid back in yearly principal installments of |

| |$250. |

| |Slide #9 |

| |YEAR 1: $1000 X .08 (interest rate) = $80 in interest cost |

| |+ |

| |$250 Principal Payment |

| |$330 Annual Payment |

| |Slide #10 |

| |YEAR 2: $750 X .08 (interest rate) = $60 in interest cost |

| |+ |

| |$250 Principal Payment |

| |$310 Annual Payment |

| | |

| |Slide #11 |

| |YEAR 3: $500 X .08 (interest rate) = $40 in interest cost |

| |+ |

| |$250 Principal Payment |

| |$290 Annual Payment |

| | |

| |Slide #12 |

| |YEAR 4: $250 X .08 (interest rate) = $20 in interest cost |

| |+ |

| |$250 Principal Payment |

| |$270 Annual Payment |

| |Slide #13 |

| |TOTAL INTEREST Paid over a 4 year Period = $200 |

|Objective 3: |Objective 3: The student will calculate interest using the Add-On Method |

| |Cue up Slide #14 |

| |The third method of computing interest is the Add-On method. |

| |In this method, interest is charged on the full principal amount for the entire life of the loan. This amount is then |

| |added to the principal and divided into even payments. |

| |Cue up Slide #15 |

| |EXAMPLE $1000 BORROWED FOR 4 YEARS AT 8% INTEREST |

| |Cue up Slide #16 |

| |Step 1: Calculate the total interest paid over the lifespan of the loan |

| |$1000 (principal amount) X .08 (interest rate) x 4 (years) = $320 |

| |This $320 is the Interest Charge (or the total amount of interest paid over the lifespan of the loan) |

| |Cue up Slide #17 |

| |Step 2: Add the interest charge to the principal amount |

| |$1000 (principal amount) + $320 (Interest Charge) = $1320 (Total amount paid) |

| |Cue up Slide #18 |

| |Step 3: Divide total amount paid by the total number of payments |

| |$1320 (total amount paid) / 4 (years)= $330 Yearly Payment |

| |Notice that the total Interest Charge is $120 higher using the Add-On method than with the Simple Interest Method. |

| |Why is that the case? |

| |Why are we paying more in interest charges – even though we have the ‘same’ interest rate, and the loan lasts for the |

| |same number of years? |

| |The answer is this: Add-On interest formulas calculate the interest rate for the entire life-span of the loan X the |

| |original amount of the loan to determine an Annual Percentage Rate. |

| |The question now is, how are Annual Percentage Rages calculated? |

| |Cue up Slide #19 |

| |Step 4: Calculating APR using the Add-On Interest Formula |

| |The ‘secret’ formula is: |

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| |Cue up Slides #20 & #21 |

| |SOOOOO |

| |For our previous add on interest example 2 X $320 divided by 4 ( 1000 + 330) X 100 |

| |EQUALS 12.03% APR MUCH HIGHER THAN THE 8% INTEREST CHARGED!! |

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| | |

|Review/Summary: |Cue up Slide #22 - Use the Jeopardy moment to review content of the lesson. |

| |Divide students into small groups. Identify the categories of Questions for students to write. Have students develop |

| |clue cards for facts presented in the lesson. On a separate sheet have students write the appropriate question for |

| |each fact card! Collect the cards. Explain the game and begin reviewing. |

|Application--Extended |Invite guest speaker {Banker) to class to visit with STUDENTS about interest |

|Classroom Activity: | |

|Application--FFA Activity: |Participate in the Farm Business Management Contest |

|Application--SAE Activity: |Have students look at any loans they might have secured for their SAE (or personal purposes). Ask them to determine |

| |the type of interest rates that were used on these loans. Were they simple, remaining balance, or add-on? |

|Evaluation: |Have students write a page where they compare and contrast the different types of interest computation methods. |

| |Make sure students use proper grammer, punctuation, spelling and sentence structure. |

| |This one page synopsis should include positive and negative aspects of each method as well as applications for each |

| |method |

|Evaluation Answer Key: |Answers will vary with student |

Interest Approach Handouts

Make additional copies as necessary so that each student in the class is presented with a mini-scenario upon entering the class for the day.

Student #1: You are about to purchase a brand new John Deere Tractor with all the bells and whistles. This tractor has a sticker price of $300,000. Because you have an outstanding credit rating, your lending institution (The Agricultural Bank of America) has agreed to give you a 1 year loan, with a fixed interest rate of 4.5%.

Original Loan Amount: $300,000

Fixed Interest Rate: 4.5%

Duration of Loan: 1 year

Annual Payment: $313,500

Student #2: You are about to purchase a brand new John Deere Tractor with all the bells and whistles. This tractor has a sticker price of $300,000. Because you have an outstanding credit rating, your lending institution (The Agricultural Bank of America) has agreed to give you a 1 year loan, with a fixed interest rate of 5.0%.

Original Loan Amount: $300,000

Fixed Interest Rate: 5.0%

Duration of Loan: 1 year

Annual Payment: $315,000

Student #3: You are about to purchase a brand new John Deere Tractor with all the bells and whistles. This tractor has a sticker price of $300,000. Because you have an outstanding credit rating, your lending institution (The Agricultural Bank of America) has agreed to give you a 1 year loan, with a fixed interest rate of 5.5%.

Original Loan Amount: $300,000

Fixed Interest Rate: 5.5%

Duration of Loan: 1 year

Annual Payment: $316,500

Student #4: You are about to purchase a brand new John Deere Tractor with all the bells and whistles. This tractor has a sticker price of $300,000. Because you have an outstanding credit rating, your lending institution (The Agricultural Bank of America) has agreed to give you a 1 year loan, with a fixed interest rate of 6.0%.

Original Loan Amount: $300,000

Fixed Interest Rate: 6.0%

Duration of Loan: 1 year

Annual Payment: $318,500

Student #5: You are about to purchase a brand new John Deere Tractor with all the bells and whistles. This tractor has a sticker price of $300,000. Because you have an outstanding credit rating, your lending institution (The Agricultural Bank of America) has agreed to give you a 1 year loan, with a fixed interest rate of 6.5%.

Original Loan Amount: $300,000

Fixed Interest Rate: 6.5%

Duration of Loan: 1 year

Annual Payment: $319,500

Student #6: You are about to purchase a brand new John Deere Tractor with all the bells and whistles. This tractor has a sticker price of $300,000. Because you have an outstanding credit rating, your lending institution (The Agricultural Bank of America) has agreed to give you a 1 year loan, with a fixed interest rate of 7.0%.

Original Loan Amount: $300,000

Fixed Interest Rate: 7.0%

Duration of Loan: 1 year

Annual Payment: $321,000

Student #7: You are about to purchase a brand new John Deere Tractor with all the bells and whistles. This tractor has a sticker price of $300,000. Because you have an outstanding credit rating, your lending institution (The Agricultural Bank of America) has agreed to give you a 1 year loan, with a fixed interest rate of 7.5%.

Original Loan Amount: $300,000

Fixed Interest Rate: 7.5%

Duration of Loan: 1 year

Annual Payment: $322,000

Student #8: You are about to purchase a brand new John Deere Tractor with all the bells and whistles. This tractor has a sticker price of $300,000. Because you have an outstanding credit rating, your lending institution (The Agricultural Bank of America) has agreed to give you a 1 year loan, with a fixed interest rate of 8.0%.

Original Loan Amount: $300,000

Fixed Interest Rate: 8.0%

Duration of Loan: 1 year

Annual Payment: $324,000

Student #9: You are about to purchase a brand new John Deere Tractor with all the bells and whistles. This tractor has a sticker price of $300,000. Because you have an outstanding credit rating, your lending institution (The Agricultural Bank of America) has agreed to give you a 1 year loan, with a fixed interest rate of 8.5%.

Original Loan Amount: $300,000

Fixed Interest Rate: 8.5%

Duration of Loan: 1 year

Annual Payment: $325,500

Student #10: You are about to purchase a brand new John Deere Tractor with all the bells and whistles. This tractor has a sticker price of $300,000. Because you have an outstanding credit rating, your lending institution (The Agricultural Bank of America) has agreed to give you a 1 year loan, with a fixed interest rate of 9.0%.

Original Loan Amount: $300,000

Fixed Interest Rate: 9.0%

Duration of Loan: 1 year

Annual Payment: $327,000

Student #11: You are about to purchase a brand new John Deere Tractor with all the bells and whistles. This tractor has a sticker price of $300,000. Because you have an outstanding credit rating, your lending institution (The Agricultural Bank of America) has agreed to give you a 1 year loan, with a fixed interest rate of 9.5%.

Original Loan Amount: $300,000

Fixed Interest Rate: 9.5%

Duration of Loan: 1 year

Annual Payment: $328,500

Student #12: You are about to purchase a brand new John Deere Tractor with all the bells and whistles. This tractor has a sticker price of $300,000. Because you have an outstanding credit rating, your lending institution (The Agricultural Bank of America) has agreed to give you a 1 year loan, with a fixed interest rate of 10%.

Original Loan Amount: $300,000

Fixed Interest Rate: 10.0%

Duration of Loan: 1 year

Annual Payment: $330,000

Student #13: You are about to purchase a brand new John Deere Tractor with all the bells and whistles. This tractor has a sticker price of $300,000. Because you have an outstanding credit rating, your lending institution (The Agricultural Bank of America) has agreed to give you a 1 year loan, with a fixed interest rate of 15%.

Original Loan Amount: $300,000

Fixed Interest Rate: 15.0%

Duration of Loan: 1 year

Annual Payment: $345,000

Student #14: You are about to purchase a brand new John Deere Tractor with all the bells and whistles. This tractor has a sticker price of $300,000. Because you have an outstanding credit rating, your lending institution (The Agricultural Bank of America) has agreed to give you a 1 year loan, with a fixed interest rate of 20%.

Original Loan Amount: $300,000

Fixed Interest Rate: 20%

Duration of Loan: 1 year

Annual Payment: $360,000

The Agricultural Bank of America – Interest Approach Overhead Master

|The Agricultural Bank of America |

|Today the loans are due on the John Deere Tractors that you purchased one year ago. |

|Based on your credit rating, each of you was given a different interest rate at which we loaned you the money to purchase your tractor. |

|Listed below are the interest rates at which 14 different tractor loans were given. |

|Please look at your loan paperwork (given to you by your instructor). Come up to the board and write in the total interest you owe us, as |

|well as the total amount you owe us. |

|Interest Rate |Total Interest Paid |Total Amount Due |

|4.5% | | |

|5.0% | | |

|5.5% | | |

|6.0% | | |

|6.5% | | |

|7.0% | | |

|7.5% | | |

|8.0% | | |

|8.5% | | |

|9.0% | | |

|9.5% | | |

|10.0% | | |

|15% | | |

|20% | | |

-----------------------

R = 2C X 100

L (P + A)

Formula Key:

R = Annual Percentage Rate

C = Total Interest Cost

L = Length of Loan in Years

P = Principal Amount Borrowed

A = Payment Amount Each Period

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