How to Calculate Simple Interest with the Simple Interest Formula

simple interest formula

The simple interest formula is used to calculate the amount of interest earned or owed when the interest is based on a fixed percentage of the principal amount for a specific period of time

The simple interest formula is used to calculate the amount of interest earned or owed when the interest is based on a fixed percentage of the principal amount for a specific period of time. The formula is as follows:

I = P * R * T

where:
I is the interest amount
P is the principal amount (the initial amount of money)
R is the interest rate (in decimal form)
T is the time period (in years)

To calculate the simple interest, simply multiply the principal amount by the interest rate and the time period.

Let’s look at an example to understand how to use the formula:

Example:
Suppose you deposited $1,000 in a savings account with an annual interest rate of 5% for 2 years. How much simple interest will you earn?

Solution:
Using the simple interest formula:
I = P * R * T

I = $1,000 * 0.05 * 2

I = $100

So, you will earn $100 as simple interest over the two-year period.

It is important to note that the interest rate should be expressed as a decimal. For example, an interest rate of 5% should be written as 0.05 in the formula.

Also, the time period T should be in years. If the time period is given in months or any other unit, it needs to be converted to years before using in the formula.

More Answers: