Simple interest is when interest is
calculated only on principal and does not include any previously
earned interest. The formula for calculating simple interest
is as follows:
I
= Prt
where
I is
simple Interest, P
is Principal, r
is the annual interest rate and t
is time (in years).
Simple interest is typically used on loans that are one year in
length or less.
Example 1
Calculate the simple interest attained from a $6,100 loan at 5% for
8 months.
Here,
P = $6,100,
r = 5% = .05, and
t = 8/12.
Simple interest is:
I
= (6100)(.05)(8/12) = 203.33
Future Value and Present Value
A
borrower, typically, has to repay the principal plus earned
interest. The total amount that the borrower has to pay is
oftentimes called the maturity value, future value
or accumulated value of
the loan. We use the letter A
to denote the accumulated value of the loan and can think of the
letter P,
the principal, as the present value of the loan. The
relationship between future and present value is:
A
= P +
I =
P +
Prt =
P(1 +
rt)
or, P
= A / (1
+ rt)
Example 2
$1,200 is invested for 11months at 8% annum. Find the
accumulated value of the loan.
Here,
A =
1200[1 + (.08)(11/12)] = 1288.
The
amount of interest earned is 1,288  1,200 = $88. The online calculator below
calculates simple interest.
Change the loan amount
to the right and then click Calculate. 


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