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Using the simple interest formula is straightforward and can be applied to various financial scenarios. The formula for simple interest is:
Simple Interest (SI) = Principal (P) × Rate (R) × Time (T)
Where:
- Principal (P) is the initial amount of money invested or borrowed.
- Rate (R) is the interest rate per period. Make sure to use the rate as a decimal (e.g., 5% should be written as 0.05).
- Time (T) is the number of periods the money is invested or borrowed for.
Follow these steps to use the simple interest formula:
Step 1: Gather the information Collect the necessary data for the calculation:
- The principal amount (P).
- The interest rate per period (R) as a decimal.
- The time period (T) for which the money is invested or borrowed.
Step 2: Plug the values into the formula Insert the values into the simple interest formula:
Simple Interest (SI) = P × R × T
Step 3: Calculate the simple interest Multiply the principal (P) by the rate (R) and the time (T) to find the simple interest.
Step 4: Find the total amount To calculate the total amount (A) after the specified time, add the simple interest to the principal:
Total Amount (A) = P + SI
Example: Let's say you borrow $1,000 from a friend for 3 years at an annual interest rate of 4%. Calculate the simple interest.
Step 1: Gather the information
- Principal (P) = $1,000
- Rate (R) = 0.04 (4% expressed as a decimal)
- Time (T) = 3 years
Step 2: Plug the values into the formula Simple Interest (SI) = $1,000 × 0.04 × 3
Step 3: Calculate the simple interest SI = $120
Step 4: Find the total amount Total Amount (A) = $1,000 + $120 Total Amount (A) = $1,120
In this example, after 3 years, you will have to pay a total of $1,120 to your friend, which includes the borrowed principal and the simple interest accumulated over the period.
