What is Simple Interest?

Simple interest calculates interest on the principal amount when it is invested for a period of time.

Simple interest is calculated on the principal amount only, not any accumulated interest.

To complete financial mathematics calculation you need good basic maths skills   Revise your decimals and percentages

Examples of Simple Interest Calculations

Calculate the value of an investment of $5,000, using simple interest, at an interest rate of 6% per annum where the interest is earned annually, at the end of the year, over 4 years.

Remember the monthly interest does not add to the initial principal. 

• I (interest earned) = n (period of investment) x P (principal invested) x i ( interest rate)
• I = 4 x 5,000 x  .06
• I = 1,200

The accumulated funds are:

P + I = 5,000 + 1,200 = 6,200

Calculating simple interest for parts of a year or more than one year

Calculate interest earned from simple interest when:

1. P = 2,000, i = 10%, n = 5 years;   I = P x i x n = 2,000 x .1 x 5 = 1,000

1. P = 3,000, i = 12.5%, n = 12 years;   I = P x i x n = 3,000 x .125 x 12 = 4,500
2. P = 4,000, i = 4%, n = 3 years 6 months;    I = P x i x n = 4,000 x .04 x 3.5 = 560 (3 + 6/12 months =3.5)
3. P = 5,000, i = 21%, n = 2 years 7 months;  I = P x i x n = 5,000 x .21 x 2.583 = 1,000 (2 +7/12 months = 2.583)
4. P = 6,000, i = 13.5%, n = 10 months;  I = P x i x n = 6,000 x .135 x .83 = 675 (10/12 months = .83)

Note: Remember to convert the percentages to decimals (divide them by 100) 10% becomes .10 or .1