Simple interest

Definition

Simple interest is a method to calculate the interest charge on a loan or investment based on the initial principal, rate of interest, and time period. It is given by the formula $I = PRT$, where $I$ is the interest, $P$ is the principal amount, $R$ is the rate of interest per period, and $T$ is time.

5 Must Know Facts For Your Next Test

1. The simple interest formula is $I = PRT$.
2. Simple interest grows linearly over time as it does not compound.
3. To solve for any variable in the simple interest formula, you can rearrange it: for example, $R = \frac{I}{PT}$.
4. Simple interest problems often involve solving for total accumulated value: $A = P + I$.
5. Understanding simple interest helps in grasping more complex concepts like exponential growth and decay.

Review Questions

• What is the formula for calculating simple interest?
• If you know the principal, rate, and time, how would you find the total amount accrued?
• How does simple interest differ from compound interest?

Related terms

Principal: The initial sum of money borrowed or invested before any interest.

Rate of Interest: The proportion of a loan charged as interest to the borrower, typically expressed as an annual percentage.

Compound Interest: Interest calculated on both the initial principal and also on the accumulated interest from previous periods.