Final answer:
The simple interest formula is I = P × R × T, where 'I' is the interest, 'P' is the principal amount, 'R' is the interest rate, and 'T' is the time period for which the money is invested or borrowed. A practical example would be calculating the simple interest on a $100 deposit at a 5% rate for one year, which would be $5.
Step-by-step explanation:
When working with simple interest, it's essential to understand what each letter in the simple interest formula represents. The formula for calculating simple interest can be expressed as I = P × R × T, where:
- I stands for the interest earned or paid over a certain period.
- P represents the principal amount, which is the initial sum of money placed in an investment or lent in a loan.
- R indicates the rate of interest per period. This rate should be expressed as a decimal in the formula, so a percentage like 5% would become 0.05.
- T refers to the time the money is invested or borrowed for, usually in years.
The practice using the simple interest formula is straightforward. For instance, if you deposit $100 at a simple interest rate of 5% for one year, the calculation would be as follows:
$100 × 0.05 × 1 = $5
Thus, the simple interest earned on a $100 deposit at a 5% interest rate for one year would be $5. Using this formula, one can also find the total future amount by adding the principal amount to the simple interest calculated. This helps in understanding how much money you will have at the end of the investment period or how much you need to pay back on a loan.