Introduction: Calculating Simple Interest

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A simple interest calculation can be used to determine the total amount of an investment with an interest rate applied over a period of time. In this instructable, you will learn and understand the simple interest formula, A=P(1+rt), through five steps including breaking down the formula, extracting givens and setting up the formula, completing the formula, understanding how the formula works, and a try it yourself example.

Materials:

-Pencil/Pen

-1 piece of paper

-Calculator (optional)

Estimated time it will take to complete: 5-10 minutes

Step 1: Breaking Down the Formula

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The total accrued (increased) amount (A) can be found by multiplying the principal amount (P) of an investment by the product of one plus the interest rate (r) and time period involved (t).

The principal investment (P) will be in a monetary format (i.e. $1000).

The interest rate (r) will usually be in a percent format (i.e. 2%) but needs to be in a decimal form to use in the calculation. You can complete this process by dividing the percent by 100 (i.e. 2/100 = .02).

The time period (t) should be given in the same time units as the interest rate. If there is a 2% interest rate per year the time period would be given as a year.

The total accrued amount (A) will be answered in a monetary format.

Step 2: Extracting the Givens & Setting Up the Formula

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When given a problem, reference the formula and extract the given information.


A=P(1+rt)

Principle amount (P) = $250

Interest rate (r) = 4% = 4/100 = .04

Time period (t) = 6 years

The complete formula for the calculation should be set up as follows:

A=250[1+(.04)(6)]

Step 3: Completing the Formula

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For the simple interest formula, remember to follow the order of operations for math using PEMDAS.

PEMDAS: Parenthesis, Exponents, Multiplication or Division, Addition or Subtraction

A=P(1+rt)

A=250[1+(.04)(6)]

A=250[1+.24]

A=250(1.24)

A=310

The total balance of the account is $310.

Step 4: Understanding How the Formula Works

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The simple interest formula adds the principle amount with the total interest over a period of time.

As seen above, each year yields a gain of $10. After 6 years, the balance increases by $60. So, our initial investment of $250 plus the gains from interest of $60 equals the amount accrued in the balance of $310.

Step 5: Try It Yourself!

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Simple Interest Formula: A=P(1+rt)

Answer: $1420

For more information on simple interest & other forms of interest formulas, visit the following links:

http://www.investopedia.com/articles/investing/020... (simple & compound interest)

http://www.calculatorsoup.com/calculators/financia... (simple interest calculator)

Comments

tomatoskins (author)2015-04-11

Oh, simple intrerest! Such a useful formula.

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