Lesson 7: Simple Interest

Property

If an amount of money, $P$, the principal, is invested for a period of $t$ years at an annual interest rate $r$, the amount of interest, $I$, earned is

where

• $I$ = interest
• $P$ = principal
• $r$ = rate
• $t$ = time

Interest earned according to this formula is called simple interest.

Examples

• To find the interest earned on 1,200 dollars at a 3% rate for 5 years, calculate $I = (1200)(0.03)(5)$, which equals 180 dollars.

Property

The simple interest formula, $I = Prt$, can be rearranged to solve for the principal, $P$. Substitute the given values for interest ($I$), rate ($r$), and time ($t$) to find the unknown principal.

Examples

• If 240 dollars in interest was earned in 4 years at a 3% rate, the principal was $P = \frac{240}{(0.03)(4)} = 2000$ dollars.

• Jessica paid 4,500 dollars in interest over 5 years on a student loan with a 6% rate. She borrowed $P = \frac{4500}{(0.06)(5)} = 15000$ dollars.