Final answer:
Simple interest is the interest earned only on the original principal amount. The formula for calculating simple interest is I = P × r × t, where 'I' is the interest, 'P' the principal, 'r' the annual interest rate, and 't' the time in years. An example calculation for a $100 investment at 5% interest for one year would yield $5 in interest.
Step-by-step explanation:
Simple interest is interest calculated on the original principal amount throughout the entire period of the investment or loan. It is different from compound interest, where interest is calculated on the principal and also on the accrued interest.
Simple Interest Formula
The formula to calculate simple interest is:
I = P × r × t
Where:
- I stands for the interest amount.
- P stands for the principal amount (the initial amount of money).
- r stands for the annual interest rate (in decimal form).
- t stands for the time the money is invested or borrowed for, in years.
Applying the Formula
To practice using the simple interest formula, let's look at an example:
A $100 deposit at a simple interest rate of 5% held for one year would earn interest as follows:
$100 × 0.05 × 1 = $5
This result represents the interest earned after one year. For multiple years, you would multiply the principal amount by the rate and by the number of years.