Algebra: Interest Word Problems

Interest Problems are word problems that use the formula for Simple Interest. There is also another type of interest called Compound Interest but we will not be discussing that in this lesson.

The formula for Simple Interest is:

i = prt

i is the interest generated.
p is the principal amount that is either invested or owed
r is the rate at which the interest is paid
t is the time that the principal amount is either invested or owed

This type of word problem is not difficult. Just remember the formula and make sure you plug in the right values. The rate is usually given in percent, which you will need to change to a decimal value.

Example 1:

John wants to have an interest income of $3,000 a year. How much must he invest for one year at 8%?

Solution:

Step 1: Write down the formula

i = prt

Step 2: Plug in the values

3000 = p × 0.08 × 1
3000 = 0.08p
p = 37,500

Answer: He must invest $37,500

Example 2:

Jane owes the bank some money at 4% per year. After half a year, she paid $45 as interest. How much money does she owe the bank?

Solution:

Step 1: Write down the formula

i = prt

Step 2: Plug in the values

45 = 0.02p
p = 2250

Answer: She owes $2,250

The following video gives another example of an interest word problem.

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