RATE OF INTEREST
Definition Of Rate Of Interest
Rate of Interest is the percentage/interest paid or received on each year on the sum of the money borrowed or lent.
The percentage at which an extra amount is charged on total principal is known as Rate of Interest.
More About Rate of Interest
Rate of interest R = I / PT, where I is the interest, P is the principal amount, T is the interest period, and R is the rate of interest.
Rate of interest can be annual, half yearly, or quarterly according to the deal made.
Example of Example of Rate of Interest
Jerald borrowed $4,000 from a bank for a period of 4 years at 4% rate of interest per annum.
Video Examples: What are interest rates?
Solved Example on Rate of Interest
Ques: Victor earned $9 as simple interest on $600 for 3 months. Find the annual rate of interest.
Choices:
A. 5%
B. 6%
C. 7%
D. 8%
Correct Answer: B
Solution:
Step 1: The rate of interest is calculated by the formula, R = 
where I is the interest, P is the principal amount, T is the interest period, and R is the interest rate.
Step 2: R = 
[Substitute I with 9, P with 600, and T with 0.25.]
Step 3: R = 9/150 [Multiply.]
Step 4: R = 0.06 [Simplify.]
Step 5: R = 6% [Convert decimal to percent.]
Step 6: The annual rate of simple interest is 6%.
Quick Summary
- Rate of interest is the percentage applied to the principal.
- It determines the cost of borrowing or the return on lending.
- It can be annual, semi-annual, or quarterly.
🍎 Teacher Insights
Use real-world examples to illustrate the impact of interest rates on loans, investments, and savings accounts. Encourage students to compare interest rates from different sources to make informed financial decisions.🎓 Prerequisites
- Percentages
- Basic Algebra
- Understanding of Principal Amount
Check Your Knowledge
Q1: What is the annual interest rate if an investment of $1000 earns $50 in simple interest after one year?
Q2: If the rate of interest is 8% per annum, what is the interest earned on $500 for 6 months?
Frequently Asked Questions
Q: What is the difference between simple and compound interest?
A: Simple interest is calculated only on the principal amount, while compound interest is calculated on the principal and accumulated interest.
Q: How does the rate of interest affect loan payments?
A: A higher rate of interest increases the total amount paid over the life of the loan and results in higher monthly payments.