simple interest formula
The simple interest formula is used to calculate the amount of interest earned or paid on a loan or investment
The simple interest formula is used to calculate the amount of interest earned or paid on a loan or investment. It is a basic formula that is straightforward to use.
The formula for calculating simple interest is:
I = P * r * t
where:
I represents the interest amount.
P represents the principal (or starting amount of money).
r represents the interest rate per time period.
t represents the time period.
To calculate simple interest, you need to have these three values: the principal amount, the interest rate, and the length of time.
Let’s break down the formula and understand each component:
1. Principal (P):
The principal refers to the initial amount of money on which the interest is calculated. For example, if you deposit $1000 into a savings account, the principal amount is $1000.
2. Interest rate (r):
The interest rate is the percentage at which the principal amount will grow or the cost of borrowing money. It is usually expressed as an annual rate. For instance, if you have an interest rate of 5%, you would use 0.05 in the formula. Make sure to convert the percentage to decimal form by dividing it by 100.
3. Time (t):
The time represents the length of time your money is invested or the loan duration. It is typically expressed in years. For example, if you want to calculate the interest earned over three years, t would be 3.
Now, let’s put it all together and go through an example:
Example:
You invest $5000 in a savings account with an annual interest rate of 4.5% for a period of 2 years. Calculate the simple interest earned.
Using the formula:
I = P * r * t
Substituting the values:
I = 5000 * 0.045 * 2
Calculating the interest:
I = 450
Therefore, the interest earned on the principal amount of $5000 over 2 years at an interest rate of 4.5% is $450.
Remember, this formula assumes that the interest is calculated and paid once at the end of the time period. It does not take into account compounding interest.
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