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        9-12

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        Finance and Responsible Lending

        This lesson teaches high school students about banks and how to have a good credit record. They will also learn about the risks of borrowing money.

        Lesson Summary

        Overview

        This lesson teaches high school students about the role of banks and the decisions they make to determine when to lend money. Students learn about the components of creditworthiness, including how banks decide who it is safe to lend money to. Students are then introduced to the basics of credit risk. As an extension activity, students do research on the kind of business they might like to own one day, and how to position it to be creditworthy.

        Objectives

        • Discuss the role of banks
        • Analyze how banks provide services through lending money
        • Learn the basic concepts of credit and interest rates
        • Research the basics of creditworthiness
        • Learn how to analyze creditworthiness in lending

        Grade Level:

        9-12

        Suggested Time:

        (1-3) 50 minute class periods

        Media Resources:

        The Origin of Banking

        In this video from Ascent of Money learn about the early foundations of credit and lending.

        The Origin of Credit

        This video from Ascent of Money traces the ascending importance of credit in modern history.

        Materials:

        Web Sites:

        Before The Lesson

        1. Bookmark the web site used in the lesson on each computer in your classroom. Using a social bookmarking tool such as del.icio.us or diigo (or an online bookmarking utility such as portaportal) will allow you to organize all the links in a central location.
        2. Preview all of the video segments and web sites used in the lesson to make certain that they are appropriate for your students, currently available, and accessible from your classroom.
        3. Download the video segmemts used in this lesson onto your hard drive, or prepare to stream the clips from your classroom.

        The Lesson

        Part I: The Role of Banks

        1. Introduce the lesson by asking students if they have a savings or checking account at a bank and asking students to name some different banks. Write the names of the banks on the board.
        2. Next, discuss the types of services that banks provide consumers in addition to checking and savings accounts. The list should include checking accounts, savings accounts, credit cards, investments like CDs, auto loans, home loans, and small business loans.
        3. Tell students they’re going to watch a video segment about how banking began. Provide them with a focus for viewing by asking them to jot down details about the evolution of the banks. Play The Origin of Banking segment for the class. Take student responses and discuss how banks evolved.
        4. Tell the class that the next activity will involve determining how and why banks provide the services detailed in the earlier discussion. First, break the class up into two sides: Consumers and Lenders. Give each side a piece of poster paper.
        5. Ask the Consumers to discuss and list the reasons they would put their money in the bank. The answers should include: safety and security, convenience of bill payment, access to cash, earning interest on funds, incentives to save.
        6. Ask the Lenders to discuss and list the reasons that banks would provide the services discussed earlier in the class. The answers should include: providing services for consumers, helping people achieve their financial goals, helping to generate economic activity, and access to capital that the bank needs in order to provide services like lending.
        7. Bring the two groups together and ask each group to choose a spokesperson to report to the class the listed Consumer/Lender reasons. Then, discuss the reasons that banks are necessary as financial intermediaries.
        8. Conclude by explaining to the students that in the next two classes students will have the opportunity to role play as bankers deciding whether or not to lend money to a variety of new businesses.

        Part II: Comprehension of Creditworthiness

        1. Begin by reviewing the ideas discussed on the previous day, focusing on the discussion of the services banks provide for consumers in return for capital.
        2. Introduce the concept of "creditworthiness" to students. Write the definition on the board. Explain to students that creditworthiness is the likelihood that a borrower will be able to repay a loan.
        3. Next provide students with a focus by asking them to pay careful attention to the evolution and purpose of credit. Play the second segment The Origin of Credit. Afterwards, discuss what students observed about the purpose of credit.
        4. Explain to students that they will be determining whether different businesses are creditworthy. Ask students to discuss as a class what might enable a business to be in good shape to repay a loan. Write their answers on the board.
        5. Direct students to the Citigroup web site to find out about the "5 Cs" of credit, which are characteristics of a person who is a good candidate to receive credit. (Answer: capacity, capital, collateral, conditions, and character).
        6. Discuss how loans, or credit can be for different periods of time, in different amounts, and can be for things that exist (like homes or cars), or things that are in the idea phase (like inventions and new businesses).
        7. Next, discuss how lenders take risk when they provide money to creditors because there is a chance that the money will not be paid back. Explain that this risk is factored into how much of an interest rate that a lender will charge a creditor.
        8. Organize groups of 4-5 students and brainstorm how interest rates are set on different loans. The answers should ultimately include an analysis of risk based on the creditworthiness of the creditor, the term of the loan, the amount of the loan, and whether the loan is collateralized.
        9. Come back together as a class. Ask each group to appoint a spokesperson, and report to the class their findings on interest rates and creditworthiness.

        Part III: The Credit Analysis Process

        1. Start class by reviewing the concepts of creditworthiness (including the 5 Cs) and interest rates. Reiterate those definitions and the overarching concept of the role of banks in lending money.
        2. Explain to students that they will now be playing the role of bankers and will need to determine the creditworthiness of five new businesses that need a loan to get started.
        3. Ask the students to break up into five groups and give each group a different scenario from the Loan Scenario Student Organizer. Ask each group to read their scenario.
        4. Next, explain to the students that they will be rating each investment idea based on risk, cost of investment, period of time of investment, and potential for success.
        5. Ask each group to appoint a spokesperson and ask them to share their results with the class. While each spokesperson speaks, ask students to rate each investment on a scale of 1 (worst) to 5 (best).
        6. Then, ask students to share their thoughts on the different credit ratings and how they were rated. Look for trends to list on the board showing the criteria students used to analyze the investments. For example, smaller loans were less risky whereas longer loan terms were more risky.
        7. As a review of the three-day lesson, ask students to think back to the first day and the opening discussion about the role of banks. Using the information in the video segments as well as observations made from the lesson activities, ask students to summarize why responsible lending is an important service for consumers and businesses.

        Extensions

        1. Ask students to think about the kind of business they might want to have or be involved in when they are older. Students can research this type of business on the web. Ask students to share their ideas with the class.
        2. Using information learned from the three-day lesson and their research, students analyze the businesses they would like to work in or own to identify which would be a better credit risk for a bank.
        3. Ask students to give supporting reasons for why they think one business is more creditworthy than another.

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