ABC Bank
Offers grand Scheme
Double your money in 5 years
Contact: Branch manager
So What is Simple Interest?
Logic: The bank will be using depositor’s money for five years, for their financial activities such as lending, capital investments in stocks etc. During that time, it will be earning from depositor’s money. It is logical on the part of bank to share a part of its earning. The extra amount that a depositor receives is called interest.
Simple Interest word Problems:
Find the simple interest for an amount of $5000 at the rate percent of 10% for three years.
Simple Interest Vs Compound interest
Simple interest:
A person can receive interest at regular intervals of time and collect the principal amount after a mutually agreed time.
Compound interest:
Alternatively, he can ask the bank to add the interest amount to the principal at regular intervals and collect the total amount after the expiry of term along with the principal amount.
As the principal amount increases regularly at certain intervals of time, the amount interest received will also, be more. We call the interest calculations of the first investment pattern as simple interest and the second one as compound interest.
Formula for simple interest calculations:
Interest is calculated for the period during which the investor, keeps his money with the bank. Longer the period, greater will be amount. Hence, the interest is directly proportional to the time (T).
If a person invests more amount of money, he will be earning more interest. Thus, the interest is directly proportional to the amount deposited. We call this amount as principal (P).
Interest is certain part of principal amount. Hence, it can be represented as a fraction. Since the amount varies, we standardize the fraction with respect to 100. Thus, the interest is always expressed in terms of percentage (R).
Simple Interest Formula:
Simple interest = Principal x Percentage of rate of interest x Time period
SI = P x R% x T
Problem solving strategy:
Step 1: Identify the Principal amount, rate of interest and time period
Step 2: Convert rate percentage of rate of interest into a decimal
[To convert percentage into decimal, divide by 100]
Step 3: Plug in the values and calculate the simple interest
Solved Example on Simple Interest :
Calculate the simple interest for the principal amount $5000, at the rate of 10% for three years.
Principal = 5000, rate of interest = 10%, time period = 3 years
10% = 10/100 = 0.1
Simple interest = 5000 x 0.1 x 3 = 1500
