simple interest


Definition of Simple Interest

  • Simple interest is the interest calculated only on the principal regardless of the interest earned so far.
  • The formula for simple interest is I = prt where I is the simple interest, p is the principal, r is the rate of interest, and t is the period of time.

Examples of Simple Interest

  • The simple interest on $4,000 at 5% for 1 year is $200.
    I = prt
    = 4,000 × × 1 = 200.

Solved Example on Simple Interest

Find the simple interest for 2 years at a rate of 6% on $1,500.
Choices:
A. $285
B. $180
C. $105
D. $240
Correct Answer: B
Solution:
Step 1: Simple Interest = prt      [Formula for simple interest.]
Step 2: = 1500 × 0.06 × 2         [Substitute p = 1500, r = 0.06, t = 2. Use 0.06 for 6%.]
Step 3: = $180                           [Simplify.]
Step 4: The simple interest on $1500 for 2 years is $180.

Related Terms for Simple Interest

  • Principal
  • Rate of Interest

Real-world Connections for Simple Interest

  • Simple Interest is a method of computing interest widely used for banking purposes.