Year 9: Financial mathematics - Simple interest

Simple interest is a straightforward way to calculate the interest earned or paid on a loan or investment. It's calculated only on the original amount, called the principal.

Formula

The formula for calculating simple interest is:

Interest (I) = Principal (P) x Rate (R) x Time (T)

Where:

• P = Principal (the initial amount of money)
• R = Rate (expressed as a decimal - e.g., 5% = 0.05)
• T = Time (expressed in years)

Example

Let’s say you deposit $1000 into a savings account that pays 3% simple interest per year for 5 years.

1. Principal (P) = $1000
2. Rate (R) = 0.03 (3% expressed as a decimal)
3. Time (T) = 5 years

Interest (I) = $1000 x 0.03 x 5 = $150

Therefore, you would earn $150 in interest after 5 years.

Calculating the Total Amount

To find the total amount (Principal + Interest) after a period, add the interest to the principal.

Total Amount = Principal + Interest