Simple Interest – The interest that is applied to the amount for the entire duration of investment or loan at flat rate. In Simple Interest amount is paid at a fixed percentage of amount borrowed or invested.
Simple Interest = Principal Amount x Rate x Time
Where;
Principal ‘P’ = Amount invested or borrowed
Rate ‘R’ = The percentage at which principal is borrowed or invested
Time ‘T’ = Time period for loan or investment
Simple Interest ‘I’ = P x R x T
Note : Rate may be applicable monthly, quarterly , half yearly or yearly .
Example 1 ;
Alia borrowed $6000 for 5 years from a bank to buy a car at simple interest of 8% per year. How much interest will she pay after two years?
Answer;
P = $ 6000
R = 8%
T = 5 years
Simple interest ‘ I’ = PRT
= 6000 x (8/100) x 5
= 2400
Alia will pay total of $ 2400 as an interest to the bank over the period of 5 years. So, per year she will pay 2400/5 = $ 480.
As this is simple interest, which will be flat for every year so after 2 years she will pay $ 482 x 2 = $960.
Example 2 ;
John took a loan from bank to purchase a motor bike worth of $ 9000 at an interest rate of 12%. If he has to repay the bank on monthly basis for 3 years, find out how much amount he will repay per month with interest to the bank?
Answer;
P = 9000, R = 12%, T = 3 years
Simple Interest ‘I’ = PRT
= 9000 x 0.12 x 3
= 3240
Total amount John will repay to bank = Principal + Interest
= 9000 + 3240
= 12240
As, he has to repay the amount on monthly basis, there are 36 months in 3 years so,
Amount to be paid per month = 12240/36 = 340
Amount to be paid per month = $340
Compound Interest
In compound interest; interest is added to principal or investment after a fixed certain period and it earns interest on total added amount.
It is an interest on interest, which increases the loan or invested amount.
Where;
P = Principal amount borrowed or invested
r = Annual Rate of Interest
n = Duration or time the interest is compounded per year
t = Number of years the amount borrowed or invested for
Example 3;
Find the compound interest on an investment of $ 50,000 for one year compounded half yearly at a rate of 7% per year?
Answer
Interest paid after one year is $ 3561.
