How Simple Interest Is Calculated
How Simple Interest Is Calculated Simple interest is calculated using the formula:
Interest = Principal (P) × Rate (R) × Time (T)
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How Simple Interest Is Calculated
Where:
- Principal (P) is the initial amount of money.
- Rate (R) is the interest rate per period (usually expressed as a percentage).
- Time (T) is the duration for which the money is borrowed or invested, typically in years.
The formula calculates the interest amount accrued over a specific period, assuming the interest is not compounded. The total amount including the principal and interest can be found by adding the principal to the interest:
Total Amount = Principal + Interest
Here's an example to illustrate the calculation:
Let's say you borrow $1,000 at an annual interest rate of 5% for a period of 2 years.
P = $1,000
R = 5% (0.05 as a decimal)
T = 2 years
Using the formula:
Interest = $1,000 × 0.05 × 2 = $100
Therefore, the interest accrued over 2 years would be $100. Adding the principal, the total amount to be repaid would be $1,000 + $100 = $1,100.
Note that simple interest assumes that the interest remains the same throughout the entire duration and is not compounded. In real-world scenarios, interest may be compounded, which means it can be calculated based on both the principal and previously accrued interest.
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