Simple Interest and Compound Interest

Identify the principal 5600 (0.089) (5)=2492

2492

In the following problem, identify the rate 158 (0.03) (6)= 2844

3%

In the following problem, identify the principal. 300(0 .07) (4)= 84

300

In the following problem, identify the years 2500 (0.045) (9)= 1012.50

9

Compound Interest

COMPOUND INTEREST is the total amount earned on both the principal amount and any interest already earned

Interest

INTEREST is the amount money paid or earned for the use of money. Simple Interest I = PxRxT, where I = INTEREST is amount of money paid or earned P =PRINCIPAL the amount of money invested or borrowed R = ANNUAL INTEREST RATE [expressed as a decimal] T = Time [expressed in years] INTEREST equals PRINCIPAL times RATE times TIME

Principal

PRINCIPAL is the original amount invested or borrowed.

Find Simple Interest

Using this sample problem, find the simple interest for $500 invested at 6.25% for three [3] years: [1] Write the simple interest formula: I = PxRxT [2] Replace P with 500, replace R with 0.0625 (decimal), and replace T with 3, so that I = 500 • 0.0625 • 3 [3] Simplify, so that we see I = 93.75 Thus, the simplest interest in this problem is $93.75.

Find the Interest Rate

Using this sample problem, find the simple interest rate for a loan, when $3600 is borrowed with monthly payments of $131.50 for 36 months, or three [3] years: [1] To find the value for I [interest], first calculate the total dollar amount that will be paid for 36 months (the total life of this loan): $131.50 • 36 = $4,734. [2] Next calculate the actual amount of interest [I] that will be paid: $4,734 (total amount actually paid for the loan) - $3,600 (original amount of borrowed) = $1,134 (amount of interest paid) Thus, P = 3,600, I = 1,134 and T = 36 months or 3 years [3] Write the simple interest formula: I = PxRxT [4] Replace P with 3,600, replace I with 1,134 and replace T with 3, so that 1,134 = 3,600 • R • 3 [5] Simplify, so that we see 1,134 = 10,800x R [6] Divide each side by 10,800: 1,134/10,800 = 10,800r/10,800, to arrive at R = 0.105 Thus, the simplest interest in this problem is 0.105 or 10.5%.

Find the Total Amount of Money

Using this sample problem, find the total amount of money [in dollars] in an account where $95 is invested at a simple interest rate of 7.5% for eight [8] months: [1] Write the simple interest formula: I = PxRxT [2] Replace P with 95, replace R with 0.075, and replace t with 8 months = 8/12 = ⅔, so that I = 95 • 0.075 • ⅔ [3] Simplify, so that we see I = 4.75 Thus, the amount in the account described in this problem is 95 + 4.75 or $99.75