Sectieoverzicht
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There are two different ways in which interest is calculated; simple interest or compound interest. In this section we will go over simple interest.
Simple interest is calculated on only the initial or principal amount invested or borrowed. The interest received or charged for each period will always be the same.
The formula to calculate the accumulated (or final) amount earned using simple interest is:
Example
Determine the value of an investment of \($13 000\) at 12% per year (also called per annum (p.a.)) simple interest for three years.
\( A=13 000(1+0.12 \times3) =$17 680 \)
You will also come across the formula \(SI=P\times r\times t\) to calculate simple interest. The following interactive video will take you through the steps to change the subject of the formula for simple interest using the alternate formula. Make sure you answer the questions on the video.
Exercise: Simple interest
Try this exercise to test that you understand how simple interest works.-
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Applications of simple interest
A hire purchase (HP) agreement, also known as an installment plan, is an application of simple interest. In HP agreements a person agrees to buy an item at a certain interest rate over a stated period and will usually pay a deposit to secure the item.
In the video you will learn how to apply the simple interest formula. After you have watched the video try the exercise that follows to test your knowledge.
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