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.

                                           

Additional Links for Simple Interest

• Click here for samples
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