What's the damage?Generate
Insurance costs:One-time yearly payment of: $1,200
or monthly payments of: $200
Giving students the opportunity to invest their money is an advanced topic in the classroom economy. You can choose whether or not to include this option in your classroom. But it does deliver an important concept: the time value of money.
At this level, students can purchase certificates of deposit (CDs) that provide flat rates of interest depending on the term, meaning how long the student must leave the money invested.
Students can invest in CDs with various terms. To keep the process simple, each CD pays a flat sum at maturity, instead of a percentage rate of the original investment (accumulated interest). The longer the term, the greater the reward to the investor.
CDs come in terms of 1, 3, 6, or 8 months (with 8 months being a "full-term" CD, ending just before the final auction of the school year). To simplify recordkeeping, students can invest only in $100 increments, and only on Bill Day each month.
Example: $100 invested in a 1-month CD on Bill Day will yield the student $15 at the maturity date, the next Bill Day. This table illustrates the money students can earn by investing $100 for 1, 3, 6, and 8 months:
|3 Months||6 Months||
8 Months (or until just before the final auction of the year)
|Earnings at the end of each term||$15||$50||$120||$200|
|Balance at maturity||$115||$150||$220||$300|
Note: In the real economy, these earnings would be high for a typical CD. We set them at this level to help the students perceive the trade-off involved: the allure of extra income versus the opportunity cost of tying up their money for the term of the CD—a period in which they won't have it to spend at the auction, for example. As is the case with all time deposits, the longer the student's commitment in term, the larger the reward at maturity.
From the first Bill Day through the second-to-last Bill Day of the year, the students can choose to invest any amount (in $100 increments) in CDs. Initially, terms of 1, 3, or 6 months, or full-term (8 months) are available. However, as time passes, the longer-term CDs naturally become unavailable because they would extend past the end of the school year. For example, you should alert students that the full-term, 8-month CD that pays $200 at maturity is only available for purchase on the first Bill Day. Also, the 6-month CD, which pays $120, won't be available after the third Bill Day.
What factors determine how much money I get back in return for my investment?
The main factors that determine CD returns for the classroom economy are the term of the deposit and the size of the deposit:
What about interest rates?
We have simplified this investment activity by using a flat dollar amount as the return on the investment, but some students may ask about the impact of interest rates.
Students should know that an interest rate is the cost of borrowing money, or the payment for lending money. From the students' perspective as lenders, the rate needs to be high enough to compensate them for the following:
The concept of compounding can be described as one of the factors contributing to higher returns over time. However in our activity, we do not compound. If the students do the math, they'll notice that a 15% return compounded over 3 months will result in a $152 payout.
What if I need the money? Can I still withdraw it prior to the maturity date?
Withdrawals before maturity are usually subject to a substantial penalty. These penalties reinforce that it is generally not in a CD holder's best interest to withdraw the money before maturity—unless the holder has the opportunity to make another investment with a significantly higher return (which would typically incur more risk and is not an option in the classroom economy) or has a serious need for the money.
Banks typically charge a penalty fee if money is withdrawn from a CD before it matures.
To keep things simple in our investment activity, we do not provide the students the option to withdraw from the CD prior to maturity. However, if you have a situation where a student needs the cash (for example, to pay for damages or rent), you may want to permit an early withdrawal—if the student is willing to pay a penalty. A penalty or fine can be lost interest and/or a small percentage of the principal.