Introduction to Simple Interest

In this lesson, we will learn about simple interest, which is a way to calculate the interest earned or paid on a principal amount over time.

What is Simple Interest?

Simple interest is calculated using the formula:

$$I = P \times r \times t$$

where:

• $I$ = Interest earned or paid
• $P$ = Principal amount (the initial amount of money)
• $r$ = Rate of interest (as a decimal)
• $t$ = Time (in years)

Steps to Calculate Simple Interest

1. Identify the Principal (P): This is the initial amount of money.
2. Determine the Rate (r): Convert the percentage rate into a decimal by dividing by 100.
3. Decide the Time (t): Use the number of years the money is invested or borrowed.
4. Apply the Formula: Plug the values into the formula to find the interest.

Example

Suppose you invest $500 (the principal) at an interest rate of 5% per year for 3 years. Let's calculate the simple interest:

1. Identify the values:

   • $P = 500$
   • $r = 5/100 = 0.05$
   • $t = 3$

2. Apply the formula:

   $$I = 500 \times 0.05 \times 3$$ $$I = 500 \times 0.15 = 75$$

So, the simple interest earned after 3 years is $75.

Key Questions

• What is the simple interest formula?
• How do you convert a percentage to a decimal?
• What are the components needed to calculate simple interest?

By understanding these concepts, you can easily calculate simple interest in various financial situations.