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Example:

Sarah deposits $4,000 at a bank at an interest rate of 4.5% per


year. How much interest will she earn at the end of 3 years?

Solution:

Simple Interest = 4,000 × 4.5% × 3 = 540

She earns $540 at the end of 3 years.

Example:

Wanda borrowed $3,000 from a bank at an interest rate of 12%


per year for a 2-year period. How much interest does she have
to pay the bank at the end of 2 years?

Solution :

Simple Interest = 3,000 × 12% × 2 = 720

She has to pay the bank $720 at the end of 2 years.

Example:

Raymond bought a car for $40, 000. He took a $20,000 loan


from a bank at an interest rate of 15% per year for a 3-year
period. What is the total amount (interest and loan) that he
would have to pay the bank at the end of 3 years?
Solution :

Simple Interest = 20,000 × 13% × 3 = 7,800

At the end of 3 years, he would have to pay

$20,000 + $7,800 = $27,800

Tutorial on Simple Interest


Examples:
1. Ian is investing $4,000 for 2 years. The interest rate is 5.5%.
How much interest will Ian earn after 2 years?

2. Doug made a 3 year investment. The interest rate was 4.5%.


After 3 years, he earned $675 in interest. How much was his
original investment?

3. Kim got a loan of $4700 to buy a used car. The interest rate
is 7.5%. She paid $1057.50 in interest. How many years did it
take her to pay off her loan?
 Show Step-by-step Solutions
How to solve interest problems using the simple interest
formula?
Interest represents a change in money.
If you have a savings account, the interest will increase your
balance based upon the interest rate paid by the bank.
If you have a loan, the interest will increase the amount you
owe based upon the interest rate charged by the bank.
Example:
1. If you invest $3,500 in savings account that pays 4% simple
interest, how much interest will you earn after 3 years? What ill
the new balance be?

2. You borrow $6000 from a loan shark. If you will owe $7200
in 18 months, what would be the simple interest rate?
 Show Step-by-step Solutions

How to use the formula for simple interest to find the principal,
the rate or the time?
Examples:
1. An investment earned $11.25 interest after 9 months. The
rate was 5%. What was the principal?

2. $2000 was invested for 3 years. It earned $204 in interest.


What was the rate?

3. A loan of $1200 had $36 in interest. The rate was 6%. What
was the length of the loan?
 Show Step-by-step Solutions
How to solve simple interest problems, compound interest
problems, continuously compounded interest problems, and
determining the effective rate of return?
Examples of Simple Interest problems
1. Joseph buys a new home using an interest only loan where
he pays only the interest on the value of the home each month.
The home is valued at $200,000 and Joesph pays 5% interest
per year on the home. How much is his monthly interest
payment?

2. Anthony puts $10000 dollars into a savings account that


pays interest every month at a rate of 1.8% per year. How much
money does Anthony have after one month? If he leaves his
original investment and the first month of interest in the
account, how much will he have after the second month?

Examples of Compound Interest problems


1. Matt is saving for a new car. He invests $5000 into an
account that pays 3% interest a year and is compound monthly.
How much will he have after 5 years?

2. Matt is planning to buy a car in three years. He wants to


invest $5000 now and hopes to have $6000 to spend on the car
when he buys it. What kind of interest rate would he need if his
investment is compounded monthly?

Examples of Continuously Compounded Interest Problems


1. Lindsey invests $1000 into an account with 4% per year
continuously compounded interest. How much will she have
after 10 years? How long will it take for her investment to
double?

2. Tony and Matt both incest $5000 in an account that receives


3% interest annually for 10 years. Tony invests in an account
that is compounded monthly. Matt invests in an account that is
compounded continuously. Who made the better investment.

Examples of Effective Rate of Return


1. If $2500 is invested at 5% compounded monthly, what is the
effective rate of return. What is the effective rate of return if
this investment is compounded semiannually?

1. Robert deposits $ 3000 in State Bank of India for 3 year which


earn him an interest of 8%.What is the amount he gets after 1
year, 2 years and 3 years?

Solution:

In every $ 100, Robert gets $ 8.

(Since rate is 8% → 8 for every 100)

Therefore, for $ 1 he gets = $ 8/100

And for $ 2000 he gets = 3000 x 8/100

= $ 240
Simple Interest for 1 year = $ 240.

Simple Interest for 2 year = $ 240 x 2

= $ 480

Simple Interest for 3 year = $ 240 x 3

= $ 720

Therefore, Amount after 1 year = Principal (P) + Simple


Interest (SI)

= 3000 + 240

= $ 3240

Amount after 2 years = Principal (P) + Simple Interest


(SI)

= 3000 + 480

= $ 3480

Amount after 3 years = Principal (P) + Simple Interest


(SI)

= 3000 + 720 = $ 3720

We observe from the above example that, the Interest cannot be


calculated without Principal, Rate and Time.

Therefore, we can conclude that Simple Interest (S.I.) depends


upon:

(i) Principal (P)

(ii) Rate (R)


(iii) Time (T)

And therefore, the formula for calculating the simple interest is

Simple Interest (SI) = {Principal (P) × Rate (R) × Time


(T)}/100

Amount (A) = Principal (P) + Interest (I)

Principal (P) = Amount (A) – Interest (I)

Interest (I) = Amount (A) – Principal (P)

2. Richard deposits $ 5400 and got back an amount of $ 6000


after a year. Find the simple interest he got.

Solution:

Principal (P) = $ 5400,

Amount (A) = $ 6000

Simple Interest (SI) = Amount (A) – Principal (P)

= 6000 - 5400

= 600

Therefore, Richard got an interest of $ 600.


3. Seth invested a certain amount of money and got back an
amount of $ 8400. If the bank paid an interest of $ 700, find the
amount Sam invested.

Solution:

Amount (A) = $ 8400,

Simple Interest (SI) = $ 700

Principal (P) = Amount (A) – Interest (I)

= 8400 - 700

= 7700

Therefore, Seth invested $ 7700.

4. Diego deposited $ 10000 for 4 year at a rate of 6% p.a. Find


the interest and amount Diego got.

Solution:

Principal (P) = $ 10000,

Time (T) = 4 years,

Rate (R) = 6% p.a.

Simple Interest (SI) = {Principal (P) × Rate (R) × Time


(T)}/100

= (10000 x 6 x 4)/100

= $ 2400
Amount (A) = Principal (P) + Interest (I)

= 10000 + 2400

= $ 12400

The interest Diego got = $ 2400.

Therefore, the amount Diego got $ 12400.