Hi, I'm Mrs. Wheelhouse and welcome to our series of lessons on maths and personal finance.

I'm really excited to look at this with you.

So let's get started.

By the end of today's lesson, you'll be able to assess different types of financial risk.

We're going to be using the phrase rate of interest today, and you can see that on the screen now along with its definition.

Feel free to pause if you want to take a moment to read through it.

Our lesson's broken into two parts.

We're gonna begin by looking at fixed and variable interest rates for saving.

Jun wants to invest a large amount of money in a savings account for several years.

Each savings account advertises a rate of interest.

Should Jun choose a savings account with a high interest rate or a low interest rate? What do you think? Pause the video and have a think now.

A savings account with a higher rate of interest means that Jun receives more money for his investment.

He considers the two options for a savings account.

Option A is a savings account with a variable interest rate, and Option B is a savings account with a fixed interest rate.

What do you think is the difference between these two types of savings account? Could this difference affect Jun's decision? Pause the video while you think about this now.

A variable rate of interest means that the interest rate can change from one year to the next.

At the time when Jun invests his money, the interest rate is 4.

7%.

A year later, the interest rate increases to 4.

9%.

A year later, the interest rate decreases to 4.

8%, and then a year after that, the interest rate decreases again to 4.

5%.

A fixed rate of interest means that the interest remains constant for an agreed number of years.

So for example, at the time when Jun invests his money, the interest rate is 4.

7%.

It will remain at 4.

7% for four years.

Now, Jun tends to keep his money in the same account for four years.

So what could be the risk with Jun choosing a savings account with a fixed rate of interest rather than a variable rate? Pause the video and think about this now.

Well, interest rates could rise, but Jun would be stuck on the lower rate of interest that he started with.

What could be the risk with Jun choosing a savings account with a variable rate of interest rather than a fixed rate? You may have thought about this already.

Interest rates could drop below the rate that Jun would've kept if he'd chosen a fixed rate account.

Let's do a quick check.

Jun invests 5,000 pounds into a savings account with a variable rate of interest.

In the first year, the interest rate is 4.

7%.

Calculate Jun's balance at the end of the first year.

Pause and do this now.

You should have got 5,235 pounds.

Now let's calculate Jun's balance at the end of each year.

So notice that the balance at the start of the year comes from the balance at the end of the previous year.

Pause the video while you work this out now.

Welcome back.

Let's see what you put.

Well, at the end of year two, we should have 5,491 pounds and 52 pence.

At the end of year three, we should have 5,755 pounds and 11 pence, and at the end of year four, we should have 6,014 pounds and nine pence.

Well done if you've got those all right.

Let's consider what you'll end up with if there's a fixed interest rate.

Please calculate the balance at the end of the fourth year.

Pause and do this now.

Welcome back.

Now you could of course have gone from method one and worked out the balance at the end of each year or gone from method two and just worked out the balance at the end of the fourth year.

Both methods lead to the same answer though, of 6,008 pounds and 37 pence.

So in this case, which option would've resulted in the most interest after four years? That's right, option A.

The variable interest rate.

The savings account with a variable rate allows Jun to withdraw his money anytime.

When could have been a good time for Jun to switch from the variable rate to the fixed rate savings account? Pause the video and have a think now.

Welcome back.

Did you spot it would've been at the start of year four? Or you might also have said the very end of year three, and that's because we had a variable interest rate of 4.

5%, but a fixed interest rate of 4.

7.

It's now time for your first task.

I'd like you to complete the simulation below for at least 10 years.

You inherit 10,000 pounds to invest in savings.

Each year, you are presented with two options for where to invest your money.

Account A is short-term savings.

The interest rate in the first year is 5.

1%.

Money can be invested or withdrawn each year and the interest rate may change each year.

Account B is a long-term savings account.

The interest rate for new customers is always 0.

3% lower than the variable rate.

When you invest money, you must wait three years before you can withdraw it and each time you invest in Account B, look at the interest rate for the year of your investment.

That is fixed for three years, so the variable rate might change in year two, but this interest rate doesn't change as well.

It's fixed for three years.

Now to determine the interest rates for each subsequent year, you roll a die.

The outcome of the die determines whether the interest rates increase or decrease compared to the previous year and by how much.

You can use this table as a template for your working if you wish.

Pause the video now while you work through the simulation.

Welcome back.

Now what we've got here is just an example and I've just shown the first seven rows.

Now, you of course may have done something differently based on these interest rates.

Maybe you'd have done the same thing as me.

I looked at what would've happened in both cases and considered what I'd invested.

Feel free to pause the video if you want to take some more time to look through my example.

Now here's some alternative choices.

You can see here I did better than I did previously.

In fact, I did 235 pounds and 11 pence better than I did before.

It's now time for the second part of our lesson, we're going to look at fixed and variable interest rates for borrowing.

Izzy's parents want to borrow a large amount of money through a loan.

Each loan advertises a rate of interest.

Izzy wants to know, should her parents choose a loan with a high interest rate or a low interest rate? What do you think? A loan with a high rate of interest would mean that Izzy's parents would have to pay more money back, so they would prefer a loan with a lower interest rate.

Is that what you said? We've got two options.

Option A, a loan with a variable interest rate, which is initially 7.

8%, and option B, a loan with a fixed interest rate of 6.

5% for five years.

What option seems better for the first year? Well done, Option B.

Because it has a lower rate of interest.

What could be a risk with choosing the 5-year fixed rate option? Pause the video where you have a think now.

Well done if you said something like this.

The variable interest rate could drop below the fixed interest rate, but Izzy parents wouldn't be able to change until the end of the 5-year period.

Now, what could be a risk with choosing the variable rate option? You may have discussed this earlier, but just as the variable interest rate could drop, it could also stay above the fixed rate or maybe even increase further.

So these parents could switch, but the fixed 6.

5% rate that they were initially offered may no longer be available.

Let's do a quick check.

Izzy's parents borrow 80,000 pounds and they're presented with two options.

They've gone for Option B.

Please calculate the balance of their loan at the end of the year.

Pause and do this now.

Welcome back.

You should have said that their balance after interest applied is 85,200 pounds.

Now in the next year, interest rates drop by 0.

8%.

Have they still saved money by choosing the 6.

5% fixed rate? Explain your reasoning.

Pause and do this now.

Welcome back.

What did you say? Well, yes, they have.

If they'd chosen the variable rate, then their balance after two years would be 91,248 pounds and 64 pence, which is more than we can see here in the table.

It's now time for your final task, and once again, you're doing a simulation, but this time we're considering what would happen if we'd borrowed money.

In this case, you're borrowing 80,000 pounds for a large purchase.

Each year you pay off 10,000 pounds and you can see we've got Option A, which is a yearly variable rate of 7.

2% for the first year, but it could change every year and at the end of each year, you can use option A again or switch to option B.

Option B is a 5-year fixed rate.

The interest rate for new customers is always 0.

7% lower than the variable rate, but if you choose that option, you are locked in for five years before you can choose again.

Remember, the interest rate will be fixed for those five years.

To determine the interest rates for each subsequent year, roll a die, and the outcome determines whether the interest rates increase or decrease compared to the previous year and by how much.

Once again, you can use this table as a template for your working if you wish.

Remember, you're going to complete the simulation until the final payment is made.

Good luck.

Pause the video now.

Welcome back.

Let's see how you got on.

Well, here's an example and you can see here that by the end of year seven, I still haven't paid off my loan.

In fact, if I continue this example, the final payment would be in the 12th year.

Were you able to pay the loan off faster? Well done if you did.

It's now time to sum up what we've looked at in our lesson today.

Financial risks can have both positive and negative outcomes.

Different types of financial risks and reward can be assessed and compared.

The risks and rewards when you are saving money can differ to when you are borrowing money, and we saw that, didn't we? High interest rates are good when we're trying to save, but are bad when we've borrowed money and we need to pay back.

Failing to assess and manage risk may lead to serious consequences such as loss of money.

I really hope you enjoyed today's lesson.

You can always have a go at those simulations again, particularly if you think you could have done better.

Well done.

I look forward to seeing you again for more lessons in the future.

Goodbye for now.