When you deposit money in a bank, the bank usually pays you for the use of your money. When you take out a loan from a bank, you have to pay the bank for the use of their money. In both cases, the money paid is called the interest. It is usually expressed as a percent. Here we shall look at a formula for simple interest.
The following table gives the Formulas for Simple Interest, Compound Interest, and Continuously Compounded Interest. Scroll down the page for more examples and solutions.
The Simple Interest Formula is given by
Simple Interest = Principal × Interest Rate × Time
I = Prt where
The Principal (P) is the amount of money deposited or borrowed.
The Interest Rate (r) is a percent of the principal earned or paid.
The Time (t) is the length of time the money is deposited or borrowed.
Sarah deposits $4,000 at a bank at an interest rate of 4.5% per year. How much interest will she earn at the end of 3 years?
Simple Interest = 4,000 × 4.5% × 3 = 540
She earns $540 at the end of 3 years.
Wanda borrowed $3,000 from a bank at an interest rate of 12% per year for a 2-year period. How much interest does she have to pay the bank at the end of 2 years?
Simple Interest = 3,000 × 12% × 2 = 720
She has to pay the bank $720 at the end of 2 years.
Raymond bought a car for $40, 000. He took a $20,000 loan from a bank at an interest rate of 15% per year for a 3-year period. What is the total amount (interest and loan) that he would have to pay the bank at the end of 3 years?
Simple Interest = 20,000 × 13% × 3 = 7,800
At the end of 3 years, he would have to pay
$20,000 + $7,800 = $27,800
Interest represents a change in money.
If you have a savings account, the interest will increase your balance based upon the interest rate paid by the bank.
If you have a loan, the interest will increase the amount you owe based upon the interest rate charged by the bank.
Examples Of Simple Interest Problems:
Examples Of Compound Interest Problems:
Examples Of Continuously Compound Interest Problems:
Example Of Effective Rate Of Return:
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