Simple Interest Concepts
What does the letter P represent in the simple interest formula?
Principal
Find the simple interest.
Principal = $500
Rate = 5%
Time = 2 years
$50
Write the compound interest formula.
A = P(1 + r/n)^(nt)
You borrow money from a friend who only charges interest on the original loan.
What type of interest is this?
Simple Interest
What does t represent in both interest formulas?
Time
Write the formula for Simple Interest.
I = P × r × t
A student invests $1,000 at 6% simple interest for 3 years.
How much interest is earned?
$180
Find the amount.
Principal = $1,000
Rate = 10%
Compounded annually
Time = 2 years
A = $1,210
A savings account earns interest every month on both your deposit and previous interest.
What type of interest is this?
Compound Interest
Convert 7% into decimal form.
0.07
What does the variable r represent?
Annual interest rate
Find the total amount after earning $320 simple interest on a principal of $800.
$1,120
Find the amount.
Principal = $2,000
Rate = 6%
Compounded annually
Time = 3 years
$2,382.03
You need money for a motorcycle. Bank A offers 8% simple interest, while Bank B offers 8% compounded monthly.
Which bank usually charges more over time?
Bank B
A principal of $900 earns 10% simple interest for 5 years.
Find the total amount.
$1,350
True or False:
Simple interest is calculated only on the original principal.
True
A loan earns $450 simple interest after 5 years at 9%.
Find the principal.
$1,000
A $5,000 investment grows to approximately how much after 4 years at 5% compounded annually?
$6,077.53
Why is compound interest often called "interest on interest"?
Because interest is added to the principal, and future interest is earned on both.
Find the amount.
Principal = $4,000
Rate = 8%
Compounded annually
Time = 2 years
$4,665.60
Explain the difference between Simple Interest and Compound Interest.
Simple interest is calculated only on the original principal, while compound interest is calculated on both the principal and previously earned interest.
A bank pays 8% simple interest.
A customer earns $480 after 4 years.
Find the principal.
P = $1,500
How much should be deposited today to have $15,000 in 10 years if interest is compounded continuously at 4.5%?
≈ $9,565.86
A person wants to maximize long-term savings.
Compound interest because it earns interest on previous interest, leading to faster growth.
A person invests $2,500 at 5% simple interest for 8 years.
Another person invests $2,500 at 5% compounded annually for 8 years.
Which investment earns more money?
The compound interest investment earns more because interest accumulates on previous interest.