Welcome to the
Foundations of Finance

You'll learn about:

Basics of interest rates, impact of interest rates, effects on your personal finances,
situations where you pay or receive interest, and opportunities and risks.

Congratulations on Your College Acceptance!

How will you pay for college?
How will you pay for your car and expenses?

Apply for government student loans or
private bank loans?
Cash out gifted Treasury Bonds and Notes?
Apply for a credit card?

Do you know which option will give you the most money and financial flexibility with the least risk?

Interest and Interest Rates

Anytime you borrow money in the form of a loan, you are responsible for paying back the amount you borrowed and any fees. Fees are called interest.

Interest rates help compensate the lender for lending money to the borrower.

Financial future:

Pay for school
First credit card
Car loan
House
Personal investments

AMOUNT BORROWED

INTEREST

TOTAL LOAN

Pay interest when you are the borrower:

Student loans • Credit cards • Car loans

BORROWER

INTEREST

LENDER

PRINCIPAL

Earn interest when you are the lender:

Savings accounts • Securities • Bonds

LENDER

INTEREST

BORROWER

PRINCIPAL

How much do you think you already know about interest rates?

NOTHING
JUST A LITTLE
A FAIR AMOUNT
A LOT

Meet Mark. Mark needs $200 to buy a tablet. Meet Mark’s Aunt Lily. Aunt Lily lends Mark $200. Mark agrees to pay back the $200.

Click Year 1 and Year 2 to see how much Mark will pay back to Aunt Lily.

$200

$120

$240

MARK

AUNT LILY

Aunt Lily provided Mark with a simple personal loan.
What is the interest rate on the loan?

Slide the button below to explore the elements of the loan.

LENDER

The lender is a person or organization (like a bank) that has money that can be lent out to a person or company that needs money. The lender anticipates the money being paid back. Aunt Lily is the lender and expects her money to be paid back by Mark.

BORROWER

The borrower is a person or organization that needs money. The borrower initiates the loan. In this case, Mark is the borrower.

PRINCIPAL

The principal is the original amount of the loan. In this example, the principal amount Mark borrowed from Aunt Lily was $200.

TERM

The term is the agreed-upon payback period of the loan. At the end of the term, the principal amount and agreed-upon interest must be repaid. Mark has 2 years to repay the principal and interest.

INTEREST

Interest is the fee that the lender charges the borrower for the loan. It is determined by an interest rate, which is expressed as a percentage of the principal. The interest charged for borrowing the $200 for 2 years is $40.

RISK

Risk is simply uncertainty about future outcomes. In this case, it is the possibility of losing money. As a lender, there is a risk that Aunt Lily will not receive her money back from Mark. It is because of this risk that interest is applied. It provides an incentive to the lender to lend out the money instead of keeping it.

EXPLORE THE LOAN ELEMENTS

Interest Rate = Percentage of the principal amount that must be paid.

Click on Aunt Lily’s Loan button to view the calculation.

R=I/Pt

R (Interest Rate) =
I (Interest)/P (Principal) t (Term)

R=40/200(2)

R=10%

Common types of rates for borrowing:
• Fixed interest rate
• Variable interest rate

Rates applied in two ways:
• Simple (nominal)
• Compound

Next, let’s look at Aunt Lily’s loan and see how the interest and total amount owed back to her changes based on the rate types and how the rates are applied.

How do the different types of interest rate applications affect the total amount you owe?

In the interactive infographic below, select a button to see how different types of interest rates work and explore examples of each. Explore all information before moving on.

	FIXED INTEREST RATE	VARIABLE INTEREST RATE
SIMPLE INTEREST	Simple interest is paid only on the loan's principal. Fixed interest rates stay the same for the entire time a loan is paid back. It is good for a borrower who wants to pay a set amount without worrying about unpredictable rate changes in the future.	Simple interest is paid only on the loan’s principal. Variable interest rates can change during the terms of the loan. This may raise or lower the monthly loan payments.
COMPOUND INTEREST	Compound interest is paid on both the principal and on any additional interest that builds up during the loan’s term. Fixed interest stays the same for the entire time a loan is paid back.	Compound interest is paid on both the principal and on any additional interest that builds up during the loan's term. Variable interest rates can change during the term of the loan.

FIXED INTEREST RATE

VARIABLE INTEREST RATE

SIMPLE INTEREST

Simple interest is paid only on the loan's principal.

Fixed interest rates stay the same for the entire time a loan is paid back. It is good for a borrower who wants to pay a set amount without worrying about unpredictable rate changes in the future.

Simple interest is paid only on the loan’s principal.

Variable interest rates can change during the terms of the loan. This may raise or lower the monthly loan payments.

COMPOUND INTEREST

Compound interest is paid on both the principal and on any additional interest that builds up during the loan’s term.

Fixed interest stays the same for the entire time a loan is paid back.

Compound interest is paid on both the principal and on any additional interest that builds up during the loan's term.

Variable interest rates can change during the term of the loan.

	FIXED INTEREST RATE	VARIABLE INTEREST RATE
SIMPLE INTEREST	A car loan or short-term loans (like Aunt Lily’s loan to Mark) use simple or nominal interest rates. Loans using this type of interest rate can calculate payments monthly or at the end of the loan, depending on the agreement.	A home loan (mortgage) is often a variable-rate loan that uses simple interest, as long as the borrower makes all monthly payments.
COMPOUND INTEREST	A savings account is an example of an investment using compound interest. Time is on your side—as time goes on, there is more principal in the account to build up interest.	A credit card account uses compound interest and often uses a variable interest rate.

FIXED INTEREST RATE

VARIABLE INTEREST RATE

SIMPLE INTEREST

A car loan or short-term loans (like Aunt Lily’s loan to Mark) use simple or nominal interest rates.

Loans using this type of interest rate can calculate payments monthly or at the end of the loan, depending on the agreement.

A home loan (mortgage) is often a variable-rate loan that uses simple interest, as long as the borrower makes all monthly payments.

COMPOUND INTEREST

A savings account is an example of an investment using compound interest. Time is on your side—as time goes on, there is more principal in the account to build up interest.

A credit card account uses compound interest and often uses a variable interest rate.

	FIXED INTEREST RATE	VARIABLE INTEREST RATE
SIMPLE INTEREST	Principal: $200 Interest rate: 10% Term: 2 years First year: $200 x 10% = $20 Second year: $200 x 10% = $20 Total interest: $40	Principal: $200 Interest rate: Prime plus 7% Term: 2 years Prime rate year 1 = 2% Prime rate year 2 = 3% First year: $200 x (2 + 7)% = $18 Second year: $200 x (3 + 7)% = $20 Total interest: $38
COMPOUND INTEREST	First year: $200 x 10% = $20 Second year: $220 x 10% = $22 Total interest: $42	Principal: $200 Interest rate: Prime plus 7% Term: 2 years Prime rate year 1 = 2% Prime rate year 2 = 3% First year: $200 x (2 + 7)% = $18 Second year: $218 x (3 + 7)% = $21.80 Total interest: $39.80

FIXED INTEREST RATE

VARIABLE INTEREST RATE

SIMPLE INTEREST

Principal: $200
Interest rate: 10%
Term: 2 years

First year: $200 x 10% = $20
Second year: $200 x 10% = $20
Total interest: $40

Principal: $200
Interest rate: Prime plus 7%
Term: 2 years
Prime rate year 1 = 2%
Prime rate year 2 = 3%

First year: $200 x (2 + 7)% = $18
Second year: $200 x (3 + 7)% = $20
Total interest: $38

COMPOUND INTEREST

First year: $200 x 10% = $20
Second year: $220 x 10% = $22
Total interest: $42

Principal: $200
Interest rate: Prime plus 7%
Term: 2 years
Prime rate year 1 = 2%
Prime rate year 2 = 3%

First year: $200 x (2 + 7)% = $18
Second year: $218 x (3 + 7)% = $21.80
Total interest: $39.80

	FIXED INTEREST RATE	VARIABLE INTEREST RATE
SIMPLE INTEREST	Principal: $200 Interest: $40 Total Paid: $240	Principal: $200 Interest: $38 Total Paid: $238
COMPOUND INTEREST	Principal: $200 Interest: $42 Total Paid: $242	Principal: $200 Interest: $39.80 Total Paid: $239.80

Mark’s friend, Simone, is offered a partial scholarship. Simone needs to borrow $10,000 to pay the remaining balance for tuition and room and board.

She went to her local credit union, which provided her with information.

Click “Begin” and see if you can identify all the elements of Simone’s loan contract.

BEGIN

Can you identify the elements of Simone’s student loan contract?

Drag and drop the labels to identify the elements of the student loan contract.

INTEREST

PRINCIPAL

TERM

INTEREST RATE

LENDER

BORROWER

VARIABLE

FIXED

INTEREST

PRINCIPAL

TERM

INTEREST RATE

LENDER

BORROWER

VARIABLE

FIXED

Good job! You correctly identified all the elements of the contract. Click the Next arrow to continue.

Not quite. Some of your answers were incorrect. Try again.

Some answers were still incorrect. The correct answers are now shown. Click the Next arrow to continue.

Consumer loans help you pay for things you do not have the full amount for.

Consumer loans include:

Student loans

Personal loans

Mortgages

And more

Car loans

Characteristics of Consumer Loans:

Paid back in installments at fixed monthly payment

Portion of payment will pay down principal

Other portion pays the calculated interest you owe – amortization

While the idea of going into debt can be scary, the benefits of obtaining a degree can outweigh the risks of debt. Since you are off to college, let’s take a look at our first example of consumer borrowing – student loans.

You can borrow from a private lender or from the Federal Government.

Federal Government loans include:

Stafford loan

Perkins loan

Parent loan (PLUS)

Federal Government loans offer lower interest rates and you don’t have to start paying them back until you graduate.

Student Loan Components:

Principal

Loan fees

Interest rate

Term

Borrowing limits

Federal Government loans have the best interest rates. Rates are subsidized by the government.

Next, let’s consider the benefits and costs of each loan when exploring the different types of loans available.

Click on any bolded word to learn more.
Remember, as you explore, consider the benefits and costs of each student loan.

	Stafford Loans	Perkins Loans	PLUS Loans	Private Loan
Lender	The U.S. Department of Education	Your College	The U.S. Department of Education	Bank or Credit Union
Borrower	You, the student	You, the student	Your Parents	You, and sometimes your parents (cosigners)
Term	10–25 years	10 years	10 years	Varies by Lender
Loan Fees	1.068%	0%	4.272%	Varies by Lender
Limits	Direct Subsidized Direct Unsubsidized	$5,500 with total $27,500 or less	Total cost of attendance with all other financial aid subtracted	Whatever you qualify for based on your credit score
Interest Rate	4.29% Fixed Direct Subsidized Direct Unsubsized	5% Fixed	6.84% Fixed	Fixed or Variable

Information taken from https://studentaid.ed.gov and is from the 2015-2016 year.

Mark still needs $5,500 to pay for school.

Based on different student loan options, do you think you can determine which loan Aunt Lily will recommend?

Click “Begin” to evaluate each offer and select which offer will have the lowest interest paid for borrowing.

BEGIN

Mark still needs $5,500 to pay for school.
Look at each offer's interest rate to help make your choice. Assume Mark qualifies for all loans and all loans are based on a 10-year term. No loan fees are used in this example.

Click on the loan you believe Aunt Lily would recommend.

Perkins Loan

5%
Fixed Interest Rate

$58.34 Projected
Monthly Payment
Federal Direct Plus

6.84%
Fixed Interest Rate

$63.41 Projected
Monthly Payment
Private Bank Loan

9.5%
Fixed Interest Rate

$71.17 Projected
Monthly Rate
Stafford Direct
Subsidized Loan

4.29%
Fixed Interest Rate

$86.78 Projected
Monthly Payment

Total Interest Paid: $747.95
Total Interest Paid: $1,500.32
Total Interest Paid: $2,108.85
Total Interest Paid: $3,040.24

Not a bad guess and, depending on the arrangement with your school, this could be the best option. While the interest rate is low, you could be responsible for starting to make interest or principal payments while still in school. Always check with the loan officer at your school about the latest Perkins information.Not your best option. If you qualify for either the Stafford Direct Unsubsidized or Subsidized, it will always be the better option. The Stafford loans will always have an interest rate lower than the Federal Direct Plus.This is your last resort. Private bank loans will have a higher interest rate than all Federal loans. Even if the monthly payment appears to be lower, you are paying the most in interest.Great choice! While the monthly payments are the highest, the government has been paying your interest on the loan while you were in college. You are saving on interest!

A car loan is another type of consumer borrowing.

If you do not have enough money to pay for a car, you could take out a loan to help you pay for the car.

How do you know which loan to choose?

How does the total amount you owe change if you do not make a down payment?

Click “Begin” and see if you can choose the best car loan.

BEGIN

Let’s go back to that car offer. You negotiated a total price of $26,000 for the car. Which offer do you think has the lowest interest paid?

Take a look at each offer's annual percentage rate (APR) term, and down payment to help make your choice. Click on an offer.

Offer 1 with Down Payment

0.9% APR for 24 months with $2,000 down payment
Offer 1 without Down Payment

0.9% APR for 24 months with $0 down
Offer 2 with Down Payment

1.9% APR for 61 months with $2,000 down payment
Offer 2 without Down Payment

1.9% APR for 61 months with $0 down

Total Interest Paid: $245.20
Total Interest Paid: $264.01
Total Interest Paid: $1,299.49
Total Interest Paid: $1,399.14

Correct! Total interest paid would be $245.20. By selecting to place money down and choosing fewer months to pay off the loan at a low APR, you will pay very little interest.Not a bad guess, but not the ultimate choice. By not putting anything down, you will pay only $18.81 more for Offer 1 than if you had put $2,000 down. You will pay a total of $264.01 in interest. Think about how else you could use that $2,000 if you did not use it as a down payment.Incorrect! While you might be interested in taking your time to pay back the loan, the benefit of extended payments means that your total interest paid is more significant. How much more? Even with the down payment, you will end up paying $1,299.49. That is $1,054.29 more than Offer 1!Incorrect! While you might not have any money to put down and you are interested in taking your time to pay back the loan, the benefit of extended payments means that your total interest paid is more significant. How much more? By taking Offer 2 without a down payment, you will pay about $1,000 more than you would if you took the same offer and did make a $2,000 down payment. Total interest paid will be $1,399.14.

Credit cards are issued or backed by banks.

Borrowing with credit cards:

You are borrowing money with the intent to pay it right back.

There is a grace period before you will owe interest charges.

Interest rates are much higher than other consumer loans.

Variable interest rates are adjusted monthly, quarterly, or yearly.

Consumer best beware! Credit cards also have other fees:

Annual fee

Transaction fees

Late fees

You can earn interest by investing or loaning money.

A simple example includes Savings Account or Money Market.

Money goes into an account and earns interest based on the rates of return.

Treasury Bonds are ways to invest and save for your future.

Treasury bonds along with Treasury Bills and Treasury Notes are examples of government securities.

Variable rates are set by a base interest rate or index.

An index is used as a benchmark.

Prime rate is a common index that is used in credit cards and car loans.

How can rates be offered that are appealing to both the borrow or lender since rates fluctuate with the market?

Watch the video to learn the Ins and Outs of Interest Rates.

When would you need to borrow or lend in your life?

Often the benefits of borrowing or lending are obvious, but the risks are not.

What exactly can happen when you borrow or lend money?

In the next section, you'll learn how these concepts apply to your everyday life.

Should you borrow or lend?

Weigh the benefits with the risks and opportunity costs.

To help us understand risks and opportunity costs, we need to answer:
Why do interest rates change and how do they affect our economy?

The Federal Reserve (Fed) keeps our economy strong.

The Fed uses several tools to do this:

Discount rate

Federal funds rate

When the discount rate or the federal funds rate changes, other rates, including the prime rate, follow.

Lowering the discount rate and the federal funds rate can stimulate the economy. Interest rates on loans decrease, encouraging more borrowing and spending.

Look how the federal funds rate has changed from the 1950s to 2016.

rates
high

slows
production

economy
slows

Resources
scarce

increased
prices

When the Fed fears inflation is too high, it will increase the discount rate or the federal funds rate to dampen the economy.

Other interest rates follow.
The higher rates discourage borrowing and the economy slows.

When rates are high:

Production slows economy slows = supplies scarce increased prices

Until interest rates decrease, supply will remain scarce.

Interest rates change over time and can benefit or harm borrowers or lenders.
What are the benefits and risks associated with lower or high interest rates in the United States, and how do they affect the economic health of the country?

Next, explore the interactive infographic, which examines the benefits and costs for lower or higher interest rates and how the borrowers and lenders react.

SET
INTEREST
RATE

Drag the button up or down to set the interest rate. Click on the images that pop up to learn more. Explore all items before moving on.

HIGH
LOW
BENEFITS
COSTS

The benefit is that you will have the money you need to accomplish your goals.
Risk, in the financial sense, is the possibility of losing money.
Lender = Risk is the potential that you may lose some of your investment.
Borrower = Risk includes owing more than you originally thought or creating a financial stress by taking on the loan.

Let’s explore some of the benefits and risks of borrowing and investing as it applies to your life.

Explore some of the benefits and risks of borrowing and investing as it applies to your life.

Click on an item to learn more. Explore all items before moving on.

• Limits on Amount You Can Borrow
• If You Drop Out: Large Debt and No Degree
• Does Not Cover All Expenses

• Lower Interest Rates
• Various Repayment Plans
• Payments Can be Deferred or Paused

• Higher Interest Rates
• Pay Interest While in School
• No Lenient Deferment Payment Options

• Covers Additional Expenses
• Ease of Application
• Funds Available Immediately

• Buying Beyond Your Means
• Value of Car Less Than Money You Owe
• Debt Can Ruin Your Credit Rating

• Money Available Immediately
• Competitive Rates and Terms
• Build Your Credit Score

• Build Up More Debt
• Interest Rates Are Higher
• Additional Fees

• Convenience Over Carrying Cash
• Can Help Build Credit Score
• Borrow Money Instantly for Purchases

• Lower Interest Rate = Poor Return
• Charge Annual Fees
• Potential Penalty Fees

• Low Risk Investments
• Access Money Whenever
• Easy to Set Up

• More Risky Investments
• May Not Earn Interest
• Not Easily Accessible

Helps Economy Grow
• Good Source of Income
• Generates Compound Interest

Another way to look at opportunity costs is to look at the benefits you would have earned by choosing a different option.

Examples
Cashing in a T-bond before it matures:
Opportunity cost = earned interest if you let it mature

Aunt Lily loaning Mark money:
Opportunity cost = what she would have gotten if she invested or spent the $200

When making choices about finances, there are trade-offs with every option.

Next, you will be presented with different scenarios and statements.

Click “Begin” to see if you can determine the opportunity costs, risks, or benefits of each.

BEGIN

Drag and drop the statement to the correct side of the scale.

You have money for a down payment

The car will depreciate faster than it takes you to pay off the loan

The money you spent on the down payment could have been earning interest for the next 20 years

You are building your credit

If you lose your job, your car could be repossessed

The down payment has made your overall payments lower

You have money for a down payment

You are incorrect.
Having the money for a down payment is a benefit. The lower your initial purchase price, the lower your payments will ultimately be. You are correct.
Having the money for a down payment is a benefit. The lower your initial purchase price, the lower your payments will ultimately be.

The car will depreciate faster than it takes you to pay off the loan

You are incorrect.
This is an example of risk. Being that you took out a longer term loan, your car will most likely depreciate faster than you can pay off your loan. You are correct.
This is an example of risk. Being that you took out a longer term loan, your car will most likely depreciate faster than you can pay off your loan.

The money you spent on the down payment could have been earning interest for the next 20 years

You are incorrect.
This is an opportunity cost. You made a choice to cash out the I Series T-Bond before it was done collecting interest. It could have collected interest at a higher rate for 20 more years. You are correct.
This is an opportunity cost. You made a choice to cash out the I Series T-Bond before it was done collecting interest. It could have collected interest at a higher rate for 20 more years

You are building your credit

You are incorrect.
By taking out a car loan you can help build your credit if you make your payments on time and pay off your loan in the terms given. You are correct.
By taking out a car loan you can help build your credit if you make your payments on time and pay off your loan in the terms given.

If you lose your job, your car could be repossessed

You are incorrect.
This is a risk. If you lose your job and can’t make your car payments, your loan could go into default and your car could be repossessed. You are correct.
If you lose your job and can’t make your car payments, your loan could go into default and your car could be repossessed.

The down payment has made your overall payments lower

You are incorrect.
This is a benefit. It is always in your best interest to put more money down to lower your total payments. You are correct.
It is always in your best interest to put more money down to lower your total payments.

Let’s get back to your upcoming graduation from high school.

In the next topic, you will apply what you have learned and make decisions on borrowing or lending.

Your Freshman year of college will cost $15,500. You earned a scholarship equal to $2,000 a year. You decided not to cash out the T-bonds given to you from your grandparents.

Total amount you’re responsible for = $13,500
Goal = Pay back your debt in 10 years after graduation

Consider the benefits, opportunity costs, and risks of each loan.
Make a decision on which loans you would like to choose.

Click “Begin” to start your analysis.
Follow the directions on the screen and make a decision on which loans you would like to choose.

BEGIN

Make a decision on which loans you would like to choose.
Please note for the following scenarios, it does not take into account loan fees.

Based on the optimal amount borrowed and taking into consideration you making the monthly payments as planned for 10 years (120 months), you will owe the following interest for Freshman year:

Review the chart and answer each question.

Total amount you are responsible for is $13,500.

How much do you want to take out in a subsidized loan? You are eligible to borrow up to $3500 with this type of loan. Please type in a number $0-$3500.

How much do you want to take out in unsubsidized loans? You are eligible to take out up to $2000. Type in an amount $0–$2000.

How much do you want to take out in a private bank loan? You are approved up to $10,000. Type in an amount $0–$10,000

LOAN TYPE	MAXIMUM AMOUNT YOU CAN BORROW	FIXED INTEREST RATE
SUBSIDIZED LOAN		4.29%
UNSUBSIDIZED LOAN		4.29%
PRIVATE BANK LOAN		10%

	Principal	Total Paid	Total Interest
Subsidized Loan	$3,500	$3,976	$476
Unsubsidized	$2,000	$3,070	$1,070*
Private Bank Loan	$8,000	$12,686	$4,686
Total Borrowed	$13,500	$19,732	$6,232

*The interest accrued while you were in college is added to your principal when you graduate. For the purposes of this learning module, it has been combined with the future interest (after college).

This is not the best choice. Remember that the subsidized loan’s interest is paid by the government while you are in school. This is the best type of government student loan and it would be in your best interest to maximize the amount you may borrow. Would you like to reenter a new amount or continue? This is the best choice! Maximizing the amount you borrow for this type of loan is an excellent choice. The most you can take out in subsidized loan is $3,500. Please type in a new amount.

This is not the best choice. Remember that the government loans have a fixed lower interest rate than a private bank loan. It would be in your best interest to maximize the amount you may borrow. Would you like to reenter a new amount or continue? Great choice! Maximizing the amount you borrow for this type of loan is an excellent idea. The most you can take out in unsubsidized loans is $2,000. Please enter a new amount.

Are you sure? Consider how much you already borrowed. Do you have enough to cover all your expenses and tuition? Would you like to reenter a new amount or continue? Did you maximize the amount you took out in the subsidized and unsubsidized loans? If so, then this could be a great choice for you. Would you like to reenter a new amount or continue? The choice is up to you, but remember that you might not want to take out more than you actually need because private bank loans have larger interest rates and are not as forgiving as government loans. Would you like to reenter a new amount or continue? You are not qualified to take out more than $10,000. Please try again.

Congratulations! You only borrowed exactly what you needed, $13,500. But how did you compare to the optimal selection? If you were the same, well done! If not, you are going to be defaulted to the optimal amounts. You want to maximize the amounts you can borrow for each government loan as the interest rates are lower. You borrowed less than what you needed and did not quite cover all your costs. Take a look at the optimal selection. You will be defaulted to the optimal selection for your loan amounts. You took out more than you needed. You only needed to take out $13,500. That means you took out more from a private bank loan. Private bank loans have higher interest rates. You would be paying more interest than what you see in the optimal selection. You are now defaulted to the optimal selection for your loan amounts.

Wow, your Sophomore and Junior years have sure flown by! You are a great student and have been earning more scholarships each year! Based on the choices you made with the help of the loan officer at your school, here are the loan decisions you made. Review the selection, then click Next.

FRESHMAN YEAR	PRINCIPAL	INTEREST RATE	TERM (YEARS)	TOTAL PAID	TOTAL INTEREST
SUBSIDIZED LOAN	$3,500	4.29%	10	$3,976	$476
UNSUBSIDIZED LOAN	$2,000	4.29%	10	$3,070	$1,070*
PRIVATE BANK LOAN	$8,000	10.00%	10	$12,686	$4,686
TOTAL BORROWED	$13,500			$19,732	$6,232

SOPHOMORE YEAR	PRINCIPAL	INTEREST RATE	TERM (YEARS)	TOTAL PAID	TOTAL INTEREST
SUBSIDIZED LOAN	$4,500	4.29%	10	$5,112	$612
UNSUBSIDIZED LOAN	$2,000	4.29%	10	$3,070	$1,070*
PRIVATE BANK LOAN	$5,500	10.00%	10	$8,722	$3,222
TOTAL BORROWED	$12,000			$16,904	$4,904

JUNIOR YEAR	PRINCIPAL	INTEREST RATE	TERM (YEARS)	TOTAL PAID	TOTAL INTEREST
SUBSIDIZED LOAN	$5,500	4.29%	10	$6,248	$748
UNSUBSIDIZED LOAN	$2,000	4.29%	10	$3,070	$1,070*
PRIVATE BANK LOAN	$3,500	10.00%	10	$5,550	$2,050
TOTAL BORROWED	$11,000			$14,868	$3,868

SENIOR YEAR	PRINCIPAL	INTEREST RATE	TERM (YEARS)	TOTAL PAID	TOTAL INTEREST
SUBSIDIZED LOAN	$5,500	4.29%	10	$6,248	$748
UNSUBSIDIZED LOAN	$2,000	4.29%	10	$3,070	$1,070*
PRIVATE BANK LOAN	$2,500	10.00%	10	$3,965	$1,465
TOTAL BORROWED	$10,000			$13,283	$3,283

*The interest accrued while you were in college is added to your principal when you graduate. For the purposes of this learning module, it has been combined with the future interest (after college).

Congratulations! You were chosen for a paid internship program with a Fortune 500 consulting company!

You will need to purchase a car to get yourself to and from the internship.

Click “Begin” to evaluate different car loan offers.

BEGIN

You find a used two-door sedan for $11,000. If you cash out a T-bond, you could put down up to $3,000. The T-bonds are earning a return of 3.5% per year. Your parents have offered to co-sign and you are eligible for the 2% APR for 5 years.

Consider the benefits, opportunity costs, and risks of the loan. Make a decision on what you want to do by clicking on the offer. Which offer do you choose?

Which do you select?

OFFER 1 WITH DOWN PAYMENT

OFFER 2 WITHOUT DOWN PAYMENT

The choice is up to you. Even though your T-bond could continue to earn interest for more years to come, you could use the money now so that your car loan payment is less.

TOTAL INTEREST FOR 60 MONTHS = $458.79
TOTAL PAID = $12,338.79

The choice is up to you. You must have felt the opportunity cost of the T-bond earning interest outweighed the lower payment.

TOTAL INTEREST FOR 60 MONTHS = $613.79
TOTAL PAID = $12,493.79

Congratulations, you are getting ready to graduate!
You have started to interview for jobs and have received two job offers.

For graduation, your grandparents have given you $5,000.
How will you invest this money?

Click “Begin” to review the different options you have for investing.

BEGIN

Review the offers below.
Based on the interest you will earn, which savings vehicle do you choose to invest your money in?

Click on a selection.

Which do you believe
will earn you the
most interest?

Money Market Account

Savings Account

Treasury Note

This isn’t a bad choice. It will certainly give you easier accessibility to your money. Total interest you will earn is $282.57.

PRINCIPAL INVESTED = $5,000
INTEREST EARNED = $282.57
TOTAL AMOUNT = $5,282.57

This choice will offer you the least amount of interest earned. It is a safe choice but the best choice. Total interest you will earn is $203.99.

PRINCIPAL INVESTED = $5,000
INTEREST EARNED = $203.99
TOTAL AMOUNT = $5,203.99

Great choice! This will give you the most interest earned at $387.91. After 1 year, you will have $5,387.91.

PRINCIPAL INVESTED = $5,000
INTEREST EARNED = $387.91
TOTAL AMOUNT = $5,387.91

Congratulations, graduate! You have done well in college.
What were the results of your borrowing and lending?
Think you can choose better?

Try playing again and see how different decisions affect your financial health.

TOTAL PRINCIPAL BORROWED

TOTAL INTEREST PAID

TOTAL PAID BACK

FRESHMAN STUDENT LOAN	SOPHOMORE STUDENT LOAN	JUNIOR STUDENT LOAN	SENIOR STUDENT LOAN	TOTALS
$13,500	$12,000	$11,000	$10,000	$46,500
$6,232	$4,904	$3,868	$3,283	$18,287
$19,732	$16,904	$14,868	$13,283	$64,787

You borrowed $46,500 and if you took the term amount of 10 years to pay back the debt, you would have paid approximately $64,787. What a difference interest rates make! Imagine if interest rates went up each year. How would you feel?

DOWN PAYMENT

PRINCIPAL

INTEREST

TOTAL

CAR LOAN

PRINCIPAL

INTEREST EARNED

TOTAL INVESTMENT

Now it’s time to see what you’ve learned. Test your knowledge of the topics in this module by answering the following questions.

Read the following definitions. Match the definitions with the components of interest rates they describe.

The person or organization that needs money
The person or organization that supplies the money that is borrowed
The original amount of the loan
The agree upon payback period of the loan
The cost to borrow money

INTEREST

TERM

LENDER

BORROWER

PRINCIPAL

INTEREST

TERM

LENDER

BORROWER

PRINCIPAL

Well done! You made the correct choices and understand the components of interest rates.

Not quite. Some of your selections were incorrect. Try again.

Not quite. The correct answers are now shown. Review this content to be sure you understand the components of interest rates.

In which of the following situations are your personal finances affected by having to pay interest? Check all that apply.

Taking out an unsubsidized student loan
Opening up a savings account
Receiving a loan for a car
Placing your money into a mutual fund
Carrying a balance on a credit card
Purchasing a Treasury Bond

SUBMIT

Well done! You made the correct choices. Your personal finances are affected when you pay or earn interest. You will pay interest when you are the borrower (e.g., student loans, car loans, or credit card balances). You will earn interest as the lender (e.g., savings accounts, mutual funds, or Treasury bonds).

Not quite. Some of your selections were incorrect. Try again.

Not quite. The correct answers are now shown. Your personal finances are affected when you pay or earn interest. You will pay interest when you are the borrower (e.g., student loans, car loans, or credit card balances). You will earn interest as the lender (e.g., savings accounts, mutual funds, or Treasury bonds).

Read the following statements about changing interest rates and how they affect our economy. Drag and drop the correct answer to complete each statement.

The cost to borrow money
The agree upon payback period of the loan
The person or organization that supplies the money that is borrowed
The person or organization that needs money
The original amount of the loan

DECREASE

DAMPEN

STIMULATE

INCREASE

DECREASE

DAMPEN

STIMULATE

INCREASE

Decreasing the discount rate and the federal funds rate will the economy.

Increasing the discount rate or federal funds rate will the economy.

Increasing the discount rate and federal funds rate will the interest rates on loans.

Decreasing the discount rate and federal funds rate will the interest rates on loans.

Well done! You made the correct choices. When the Federal Reserve wants to stimulate the economy, it will decrease the discount rate and federal funds rate, causing a decrease in interest rates. This encourages people to borrow and spend. When the Fed wants to slow down the economy, it will increase the discount rate and federal funds rate, causing the interest rates to rise. This will discourage borrowing and spending, and the economy slows.

Not quite. Some of your selections were incorrect. Try again.

Not quite. The correct answers are now shown. When the Federal Reserve wants to stimulate the economy, it will decrease the discount rate and federal funds rate, causing a decrease in interest rates. This encourages people to borrow and spend. When the Fed wants to slow down the economy, it will increase the discount rate and federal funds rate, causing the interest rates to rise. This will discourage borrowing and spending, and the economy slows.

Think about the benefits and risks of borrowing and investing as they apply to your life.

Read each statement below and determine if it best describes a benefit or risk. Select the correct answer from the drop-down menu.

Taking out a subsidized student loan that has lower interest rates
Placing your money in an investment account that is not easily accessible
Applying for a rarely used credit card in order to increase your credit score
Taking out an unsubsidized student loan and making late payments
Opening a credit card that has higher interest rates
Taking out a car loan that offers competitive rates and terms
Setting up a savings account at your local bank

Well done! You made the correct choices. The clear benefit of a loan or investment is that you will have the money you need to accomplish your goals. As the borrower, risks include owing more than you originally thought, or creating financial stress by taking on the loan. As a lender, the risk is the potential that you may lose some of your investment.

Not quite. Some of your selections were incorrect. Try again.

Not quite. The correct answers are now shown. The clear benefit of a loan or investment is that you will have the money you need to accomplish your goals. As the borrower, risks include owing more than you originally thought, or creating financial stress by taking on the loan. As a lender, the risk is the potential that you may lose some of your investment.

Here is how you did.
100%

Looks like you need more practice.
Consider going through the module again.Not bad! You understand the components of interest rates. You are on your way to knowing the importance of interest rates to your personal financial health and the economy.Great job! You really understand interest rates and how they affect the economy and your personal financial health.

How much do you think you know now about interest rates?

NOTHING
JUST A LITTLE
A FAIR AMOUNT
A LOT

Congratulations!

DOWNLOAD

Thanks for taking part in this interactive.

Return to the Econ Essentials home page: http://www.econessentialsinschool.com

amortization: The process during a fixed payment schedule installment loan where a portion of the payment goes toward paying down the principal and the other portion to paying down the interest.
annual fee: The fee charged for the right to own and use the credit card.
APR (annual percentage rate): A broad measure of the cost of borrowing. For example, many loans charge fees on top of interest. When these fees are included in the yearly cost of a loan, the percentage is call the APR.
borrower: A person or organization that needs money.
car loan: A loan you take out to finance the purchase of a new car.
compound interest rate: Calculates interest not only on the principal, but also on the interest.
discount rate: The interest rate that the Fed charges banks for a loan; this is a secured loan.
down payment: Cash paid toward the cost of a purchase to reduce the principal amount owed on a loan.
federal funds rate: The rate that banks charge one another for overnight loans; this is an unsecured loan.
fixed interest rate: A percentage that stays the same (or fixed) for the entire time the loan is paid back (term).
grace period: An amount of time (usually 20–30 days) before you have to pay back what you borrowed with the credit card before incurring interest charges.
interest: The cost a borrower pays a lender for borrowing money, or the fee that the lender charges the borrower for the loan. It is determined by an interest rate.
interest charges: The charges that occur when you do not pay back the amount you borrowed on a credit card; the charge is a percentage of the principal amount you owe.
interest rate: The percentage rate of the principal that the borrower must pay in interest.
late fee: If you miss a payment or are late, you will be charged a fee.
lender: A person or organization (like a bank) that has money that can be lent out to a person or company that needs money. The lender anticipates the money being paid back.
loan: Money given to or received from another party with the agreement that the money will be repaid in the full amount along with interest.
money market account: An account that pays interest that varies according to current interest rates, typically higher than savings account rates, and with limitations on how much can be withdrawn.
opportunity cost: The actual cost of a choice that you decided against in order to choose something else.
Parent loan (PLUS): A low-cost student loan designed for parents to borrow money on the behalf of post-secondary undergraduate students.
Perkins loan: A program that provides low-interest student loans to those who demonstrate exceptional financial need.
prime rate: The interest rate that commercial banks charge their best-rated customers, largely determined by the federal funds rate.
principal: The original amount of the loan.
rates of return: A measure of the gain or loss on an investment over a given period of time, calculated as a percentage of the investment’s cost.
risk: Uncertainty about future outcomes.
savings account: An account kept at a bank that earns a small amount of interest.
simple or nominal interest rate: A percentage of the principal only.
Stafford loan: A federal, fixed-rate student loan designed for college students who are attending school at least half-time.
subsidized: The interest of the loan is paid by the Federal Government while the student is in school; the student starts paying the interest six months after graduation.
term: The agreed-upon payback period of the loan; at the end of the term, the principal amount and agreed-upon interest must be repaid.
transaction fee: The fee associated with using the cash advance option on your credit card.
Treasury bill: A short-term security issued by the U.S. Treasury that lasts for one year or less; it does not pay interest but is issued at a discount and can be sold at full price.
Treasury bond: A long-term bond issued by the U.S. Treasury; they pay interest twice a year and last between 10 and 30 years.
Treasury note: A debt instrument issued by the U.S. government that lasts between 1 and 10 years; it pays a fixed interest rate.
variable interest rate: A rate that can change as the loan is repaid; the rate can go up or down based on certain factors, and this can sometimes mean the recurring payment changes accordingly.

Welcome to theFoundations of Finance

You'll learn about:

Basics of interest rates, impact of interest rates, effects on your personal finances,situations where you pay or receive interest, and opportunities and risks.

Congratulations on Your College Acceptance!

Interest and Interest Rates

Pay interest when you are the borrower:

Student loans • Credit cards • Car loans

Earn interest when you are the lender:

Savings accounts • Securities • Bonds

How much do you think you already know about interest rates?

Meet Mark. Mark needs $200 to buy a tablet. Meet Mark’s Aunt Lily. Aunt Lily lends Mark $200. Mark agrees to pay back the $200.

Click Year 1 and Year 2 to see how much Mark will pay back to Aunt Lily.

MARK

AUNT LILY

Aunt Lily provided Mark with a simple personal loan. What is the interest rate on the loan?

Slide the button below to explore the elements of the loan.

LENDER

The lender is a person or organization (like a bank) that has money that can be lent out to a person or company that needs money. The lender anticipates the money being paid back. Aunt Lily is the lender and expects her money to be paid back by Mark.

BORROWER

The borrower is a person or organization that needs money. The borrower initiates the loan. In this case, Mark is the borrower.

PRINCIPAL

The principal is the original amount of the loan. In this example, the principal amount Mark borrowed from Aunt Lily was $200.

TERM

The term is the agreed-upon payback period of the loan. At the end of the term, the principal amount and agreed-upon interest must be repaid. Mark has 2 years to repay the principal and interest.

INTEREST

Interest is the fee that the lender charges the borrower for the loan. It is determined by an interest rate, which is expressed as a percentage of the principal. The interest charged for borrowing the $200 for 2 years is $40.

RISK

Interest Rate = Percentage of the principal amount that must be paid.

Click on Aunt Lily’s Loan button to view the calculation.

Common types of rates for borrowing: • Fixed interest rate • Variable interest rate

Rates applied in two ways: • Simple (nominal) • Compound

Next, let’s look at Aunt Lily’s loan and see how the interest and total amount owed back to her changes based on the rate types and how the rates are applied.

How do the different types of interest rate applications affect the total amount you owe?

In the interactive infographic below, select a button to see how different types of interest rates work and explore examples of each. Explore all information before moving on.

Mark’s friend, Simone, is offered a partial scholarship. Simone needs to borrow $10,000 to pay the remaining balance for tuition and room and board.She went to her local credit union, which provided her with information.

Click “Begin” and see if you can identify all the elements of Simone’s loan contract.

Can you identify the elements of Simone’s student loan contract?

Drag and drop the labels to identify the elements of the student loan contract.

Federal Government loans have the best interest rates. Rates are subsidized by the government.

Next, let’s consider the benefits and costs of each loan when exploring the different types of loans available.

Click on any bolded word to learn more.Remember, as you explore, consider the benefits and costs of each student loan.

Information taken from https://studentaid.ed.gov and is from the 2015-2016 year.

Mark still needs $5,500 to pay for school.Based on different student loan options, do you think you can determine which loan Aunt Lily will recommend?

Click “Begin” to evaluate each offer and select which offer will have the lowest interest paid for borrowing.

Mark still needs $5,500 to pay for school.Look at each offer's interest rate to help make your choice. Assume Mark qualifies for all loans and all loans are based on a 10-year term. No loan fees are used in this example.

Click on the loan you believe Aunt Lily would recommend.

A car loan is another type of consumer borrowing. If you do not have enough money to pay for a car, you could take out a loan to help you pay for the car.

How do you know which loan to choose? How does the total amount you owe change if you do not make a down payment?

Click “Begin” and see if you can choose the best car loan.

Let’s go back to that car offer. You negotiated a total price of $26,000 for the car. Which offer do you think has the lowest interest paid?

Take a look at each offer's annual percentage rate (APR) term, and down payment to help make your choice. Click on an offer.

When would you need to borrow or lend in your life? Often the benefits of borrowing or lending are obvious, but the risks are not. What exactly can happen when you borrow or lend money? In the next section, you'll learn how these concepts apply to your everyday life.

Should you borrow or lend? Weigh the benefits with the risks and opportunity costs. To help us understand risks and opportunity costs, we need to answer:Why do interest rates change and how do they affect our economy?

The Federal Reserve (Fed) keeps our economy strong. The Fed uses several tools to do this: Discount rate Federal funds rate When the discount rate or the federal funds rate changes, other rates, including the prime rate, follow.

Lowering the discount rate and the federal funds rate can stimulate the economy. Interest rates on loans decrease, encouraging more borrowing and spending.

Look how the federal funds rate has changed from the 1950s to 2016.

When the Fed fears inflation is too high, it will increase the discount rate or the federal funds rate to dampen the economy.Other interest rates follow.The higher rates discourage borrowing and the economy slows.

When rates are high:Production slows economy slows = supplies scarce increased pricesUntil interest rates decrease, supply will remain scarce.

Interest rates change over time and can benefit or harm borrowers or lenders.What are the benefits and risks associated with lower or high interest rates in the United States, and how do they affect the economic health of the country?

Next, explore the interactive infographic, which examines the benefits and costs for lower or higher interest rates and how the borrowers and lenders react.

Drag the button up or down to set the interest rate. Click on the images that pop up to learn more. Explore all items before moving on.

Let’s explore some of the benefits and risks of borrowing and investing as it applies to your life.

Explore some of the benefits and risks of borrowing and investing as it applies to your life.

Click on an item to learn more. Explore all items before moving on.

Next, you will be presented with different scenarios and statements.

Click “Begin” to see if you can determine the opportunity costs, risks, or benefits of each.

Drag and drop the statement to the correct side of the scale.

Let’s get back to your upcoming graduation from high school.

In the next topic, you will apply what you have learned and make decisions on borrowing or lending.

Click “Begin” to start your analysis.Follow the directions on the screen and make a decision on which loans you would like to choose.

Make a decision on which loans you would like to choose. Please note for the following scenarios, it does not take into account loan fees.

Based on the optimal amount borrowed and taking into consideration you making the monthly payments as planned for 10 years (120 months), you will owe the following interest for Freshman year:

Review the chart and answer each question.

Total amount you are responsible for is $13,500.

*The interest accrued while you were in college is added to your principal when you graduate. For the purposes of this learning module, it has been combined with the future interest (after college).

Wow, your Sophomore and Junior years have sure flown by! You are a great student and have been earning more scholarships each year! Based on the choices you made with the help of the loan officer at your school, here are the loan decisions you made. Review the selection, then click Next.

*The interest accrued while you were in college is added to your principal when you graduate. For the purposes of this learning module, it has been combined with the future interest (after college).

Congratulations! You were chosen for a paid internship program with a Fortune 500 consulting company! You will need to purchase a car to get yourself to and from the internship.

Click “Begin” to evaluate different car loan offers.

You find a used two-door sedan for $11,000. If you cash out a T-bond, you could put down up to $3,000. The T-bonds are earning a return of 3.5% per year. Your parents have offered to co-sign and you are eligible for the 2% APR for 5 years.

Welcome to the
Foundations of Finance

Basics of interest rates, impact of interest rates, effects on your personal finances,
situations where you pay or receive interest, and opportunities and risks.

Aunt Lily provided Mark with a simple personal loan.
What is the interest rate on the loan?

Common types of rates for borrowing:
• Fixed interest rate
• Variable interest rate

Rates applied in two ways:
• Simple (nominal)
• Compound

Mark’s friend, Simone, is offered a partial scholarship. Simone needs to borrow $10,000 to pay the remaining balance for tuition and room and board.

She went to her local credit union, which provided her with information.

Click on any bolded word to learn more.
Remember, as you explore, consider the benefits and costs of each student loan.

Mark still needs $5,500 to pay for school.

Based on different student loan options, do you think you can determine which loan Aunt Lily will recommend?

Mark still needs $5,500 to pay for school.
Look at each offer's interest rate to help make your choice. Assume Mark qualifies for all loans and all loans are based on a 10-year term. No loan fees are used in this example.

A car loan is another type of consumer borrowing.

If you do not have enough money to pay for a car, you could take out a loan to help you pay for the car.

How do you know which loan to choose?

How does the total amount you owe change if you do not make a down payment?

When would you need to borrow or lend in your life?

Often the benefits of borrowing or lending are obvious, but the risks are not.

What exactly can happen when you borrow or lend money?

In the next section, you'll learn how these concepts apply to your everyday life.

Should you borrow or lend?

Weigh the benefits with the risks and opportunity costs.

To help us understand risks and opportunity costs, we need to answer:
Why do interest rates change and how do they affect our economy?

The Federal Reserve (Fed) keeps our economy strong.

The Fed uses several tools to do this:

Discount rate

Federal funds rate

When the discount rate or the federal funds rate changes, other rates, including the prime rate, follow.

When the Fed fears inflation is too high, it will increase the discount rate or the federal funds rate to dampen the economy.

Other interest rates follow.
The higher rates discourage borrowing and the economy slows.

When rates are high:

Production slows economy slows = supplies scarce increased prices

Until interest rates decrease, supply will remain scarce.

Interest rates change over time and can benefit or harm borrowers or lenders.
What are the benefits and risks associated with lower or high interest rates in the United States, and how do they affect the economic health of the country?

Click “Begin” to start your analysis.
Follow the directions on the screen and make a decision on which loans you would like to choose.

Make a decision on which loans you would like to choose.
Please note for the following scenarios, it does not take into account loan fees.

Congratulations! You were chosen for a paid internship program with a Fortune 500 consulting company!

You will need to purchase a car to get yourself to and from the internship.

Congratulations, you are getting ready to graduate!
You have started to interview for jobs and have received two job offers.

For graduation, your grandparents have given you $5,000.
How will you invest this money?

Review the offers below.
Based on the interest you will earn, which savings vehicle do you choose to invest your money in?

Which do you believe
will earn you the
most interest?

Congratulations, graduate! You have done well in college.
What were the results of your borrowing and lending?
Think you can choose better?

Here is how you did.
100%