Simple interest

When someone pays simple interest (I), he or she pays interest on the principal only, not on the interest that has already been paid. To find the interest you can use this formula.
Simple interest

Interest = Principal × Rate of interest × Time.

  • The principal is the amount of money you borrow or invest.
  • The rate of interest is the percent charged for the use of money.
  • The time is the duration or the time the money is invested or borrowed in years.

A few exercises showing how to compute or find the simple interest.


Exercise #1:

Compute the interest if the principal is 2000 dollars at a rate of interest of 5% for 4 years.

I = p × r × t

p = 2000, r = 5%, and t = 4

Interest = 2000 × 5% × 4

Interest = 2000 × 0.05 × 4

Interest = 100 × 4 = 400

After 4 years, the simple interest on a 2000 principal is 400 dollars.

Exercise # 2

Suppose you inherited a lump sum of 2 millions dollars. Compute the interest if the principal is 2,000,000 dollars at a rate of interest of 4% for a year.

I = p × r × t

p = 2000,000, r = 4%, and t = 1

Interest = 2,000,000 × 4% × 1

Interest = 2,000,000 × 0.04 × 1

Interest = 80,000 × 1 = 80,000

If you have 2 millions dollars and your bank pays you 4% interest every year, you will earn 80,000 dollars every year.

Great, you can perhaps quit your day time job!

Exercise # 3

Compute the interest if the principal is 100 dollars at a rate of interest of 2% for 10 years.

I = p × r × t

p = 100, r = 2%, and t = 10

Interest = 100 × 2% × 10

Interest = 100 × 0.02 × 10

Interest = 2 × 10 = 20

With so little money invested and such low interest, 10 years investment gives you a mere 20 dollars. It is hard to imagine that some banks do not even give a rate of 2%. You may for instance get an interest rate of 0.05% from Bank of America. This might turn out to be a waste of time!

Take the simple interest quiz to see if you really understood this lesson. Some questions are tricky. Read carefully before answering a question!

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