Simple Interest

In this lesson we will learn how to solve problems involving simple interest.




When you deposit money in a savings account, the bank pays you interest at a certain rate called interest rate. There are two types of interest: simple interest and compound interest. In this lesson we will talk about simple interest. We will use the following important formula:

I = prt

I - represents the interest (or the amount of money that the bank will pay you for allowing it to use your savings account).
p – represents the principal ( the money you initially deposit)
r – represents the interest rate
t – represents the time in years.

Example:

Mario deposits $3000 in a savings account at the interest rate of 5% per year. How much simple interest will Mario earn in three years?

Solution:

Let’s identify the important elements in this problem. The initial deposit of $3000 is the principal (p = $3000). The interest rate, r = 5%. The time is t = 3 years. We have to find the simple interest, I.

In the formula I = prt, replace p, r, and t with the given values.

I = 3000 x 5% x 3

Change 5% to a decimal by moving the decimal point twice to the left:

5% = 0.05

Therefore, I = 3000 x 0.05 x 3 = $450.

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