Simple Interest

Transcript

Simple Interest Simple Interest is that you only earn interest on the original amount of money you started with. We call that original amount the Principal. Here is the formula we use: Interest = Principal × Rate × Time = P × R × T To find the Total Amount you have at the end, you use: Amount = Principal + Interest = P + I Let's define our terms: 𝑰= Interest (the extra money earned or owed) 𝑷= Principal (the starting amount of money) 𝑹= Rate (the percentage of interest per year, written as a decimal or fraction) 𝑻= Time (how many years the money is borrowed or saved) 𝑨= Total Amount (Principal + Interest) Real-Life Example: Saving for a Goal Let's say you want to save up to buy some new tech gear. You deposit ₹10,000 into a bank account that pays 𝟓% simple interest per year. You decide to leave the money there for 𝟑 years. Let's plug it into our formula: Principal = P = ₹ 10,000 Rate = R = 5% per year = 5/100 Time = T = 3 years Note: Since rate is per year, we use time in per year Now, we can write Interest = Principal × Rate × Time = P × R × T = 10,000 × 𝟓/𝟏𝟎𝟎 × 3 = 100 × 5 × 3 = 100 × 15 = ₹ 1,500 You earned ₹1,500 in pure interest! And, total money at the end of 3 years is Amount = Principal + Interest = 10,000 + 1,500 = 11,500 You now have ₹11,500 in your account. Note: Every single year, you earned exactly ₹500 in interest. It never changed. Where do we get the Formula for Simple Interest? DERIVATION OF THE SIMPLE INTEREST FORMULA