Simple interest is a straightforward method to calculate interest on the principal amount only.
The formula to calculate simple interest is I = P × r × t, where 'I' is the interest, 'P' is the principal, 'r' is the rate of interest, and 't' is the time period.
The simple amount is the sum of the principal and the interest earned over a period.
Simple interest does not compound, meaning it is not calculated on previously earned interest.
This method is useful for managing loans, investments, and personal finance scenarios where interest is calculated on the original principal.
Practicing with different examples can help solidify your understanding of simple interest and its applications.
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Chapter 4 – Mathematics of Investment (Simple Interest)
Introduction to Simple Interest
Simple interest is a method used to calculate the interest charged or earned on a principal amount of money over a specific period. It is commonly used in finance for loans, savings accounts, and investments. The formula for calculating simple interest is straightforward and easy to understand.
The Simple Interest Formula
The formula for calculating simple interest is:
I = P × R × T
Where:
• I stands for Interest, which is the money earned or paid.
• P stands for Principal, which is the initial amount of money invested or borrowed.
• R stands for Rate of interest per period, expressed as a decimal.
• T stands for Time the money is invested or borrowed for, typically in years.
How to Use the Formula
To find the simple interest, follow these steps:
1. Convert the interest rate from a percentage to a decimal by dividing by 100.
2. Multiply the principal (P) by the rate (R) and then by the time (T).
3. The result is the interest (I) earned or paid.
Example Calculation
Let's say you invest $1,000 in a savings account with an annual interest rate of 5% for 3 years. Using the simple interest formula:
I = P × R × T
I = 1000 × 0.05 × 3
I = $150
So, the interest earned over 3 years would be $150.
Simple Amount
The Simple Amount refers to the total sum of money you have after the interest has been added to the principal. The formula to calculate the simple amount is:
A = P + I
Where:
• A stands for Amount, which is the total money including principal and interest.
• P stands for Principal, which is the initial amount of money invested or borrowed.
• I stands for Interest, which is the money earned or paid.
Example Calculation
Using the previous example where you earned $150 in interest on a $1,000 investment, the simple amount would be calculated as:
A = P + I
A = 1000 + 150
A = $1150
So, the total amount after 3 years would be $1150.
Key Points to Remember
• Simple interest is calculated only on the principal amount, not on any interest earned previously.
• It's straightforward and easy to calculate using the formula I = P × R × T.
• The simple amount includes both the principal and the interest earned.
• Understanding simple interest is useful for managing personal finances, loans, and investments.
We hope this guide helps you understand the basics of simple interest. Remember to practice with examples to gain a better grasp of how it works in real-world situations.
