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Monday, July 24, 2023

How to Use the Simple Interest Formula

 

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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.

 
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