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Questions and Answers
What is the formula for calculating simple interest?
What is the formula for calculating simple interest?
Simple interest increases with time.
Simple interest increases with time.
True (A)
If a principal amount of $1,000 is loaned at a rate of 5% for 3 years, what is the simple interest earned?
If a principal amount of $1,000 is loaned at a rate of 5% for 3 years, what is the simple interest earned?
$150
In simple interest, the interest amount is calculated on the ________ amount.
In simple interest, the interest amount is calculated on the ________ amount.
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Match the following terms related to simple interest with their definitions:
Match the following terms related to simple interest with their definitions:
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Study Notes
Definition
- Simple interest is a method of calculating interest on a principal amount, where the interest earned is not added to the principal to determine the interest for subsequent periods.
- It is calculated only on the initial principal amount.
- The interest earned remains constant over the entire investment period.
Formula
- The formula for simple interest is: Simple Interest = (Principal × Rate × Time) / 100
- Where:
- Principal (P) is the initial amount of money.
- Rate (R) is the interest rate per year (expressed as a percentage).
- Time (T) is the duration of the investment in years.
Calculation Example
- Suppose you invest $1000 at a simple interest rate of 5% for 2 years.
- Simple Interest = (1000 × 5 × 2) / 100 = $100
- The total amount at the end of 2 years would be $1000 + $100 = $1100
Key Characteristics
- Simple interest is straightforward to calculate.
- It is a relatively low-return investment.
- It is easier to understand than compound interest.
- The total interest earned is fixed over the loan or investment period.
- Interest is calculated only on the principal amount borrowed or invested.
Applications
- Simple interest is frequently used in:
- Short-term loans
- Simple savings accounts
- Certificates of deposit for short maturities
- Some educational loans
- Payroll calculations for short-term advances/payments
Differences from Compound Interest
- In compound interest, the interest earned in each period is added to the principal, and interest is calculated on this new, larger principal amount.
- Simple interest calculates interest only on the initial principal.
- Compound interest typically yields a higher return than simple interest in the long term.
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Description
Test your knowledge on simple interest with this quiz. You'll learn about the formula, how to calculate simple interest, and its key characteristics. Perfect for anyone studying finance or basic mathematics.
