| If you have extra money you can invest it in a bank,
building society or government bonds, for example, and this investment
will earn money for you.
The sum of money invested is called the principal. We
often denote the principal by P. The money earned by the
principal is called the interest and it is earned at a rate known
as the interest rate. Interest is often represented by I
and the interest rate by r.
There are many ways in which interest is calculated and paid. We
will be looking at the simplest of the methods used. It is called simple
interest.
Let us consider an example of an investment on simple interest terms of
$100 invested for 3 years at 10% per annum (p.a).
Each year the investor will receive interest equal to 10% of the
principal. That is:
The investor also gets the principal of $100 back at the end of the
third year.
Note that we could have calculated the interest I, as follows:
In general:
If $P is invested at the rate of r per annum for t
years, then the total (simple) interest, $I, earned is given by
I = Prt
Example 15
Solution:
So, the total interest earned is $65.63.
Note:
Both r and t need to be expressed in the same
units. So, if the rate is measured in per cent per annum (i.e.
annually), then the time needs to be measured in years.
Key Terms
principal, interest, simple
interest, interest rate, simple
interest formula |
