SIMPLE INTEREST

Simple interest is a method of calculating the interest accrued on a principal amount or loan over time. It is a straightforward and commonly used formula in finance. Unlike compound interest, which takes into account the interest on both the principal and previously earned interest, simple interest is calculated only on the initial principal.

Formula for Simple Interest:

The formula for calculating simple interest ($SI$) is:

$SI=(P\times R\times T)/100$

where:

• $SI$ is the simple interest,
• $P$ is the principal amount (initial amount or loan),
• $R$ is the rate of interest per time period (usually per annum), and
• $T$ is the time the money is borrowed or invested for, measured in years.

Calculation:

To calculate simple interest, you can use the formula mentioned above. The result will give you the amount of interest earned or charged on the principal amount over a specific period

Example:

Suppose you invest $2,500 in a savings account that offers a simple interest rate of 4% per annum. Calculate the simple interest earned after 2 years.

Solution:

The formula for simple interest ($SI$) is given by:

$SI=P\times R\times T$

where:

• $P$ is the principal amount (initial investment),
• $R$ is the rate of interest per time period (per annum in this case),
• $T$ is the time the money is invested or borrowed for, measured in years.

Given that P = $2,500, $R=0.04$ (4% expressed as a decimal), and $T=2$ years, we can substitute these values into the formula:

$SI=2500\times 0.04\times 2$

SI = $200

Therefore, the simple interest earned after 2 years on a $2,500 investment with a 4% annual interest rate is $200.

This means that over the 2-year period, you would earn $200 in interest on your initial investment of $2,500 at a simple interest rate of 4% per annum