Tuesday, December 3, 2019

Simple Interest Essay Example

Simple Interest Essay Discuss what simple interest is and how it is calculated. In your discussion examine the reasons for using simple interest.Simple interest is an example of arithmetic growth. In case of simple interest, the amount of interest generated is constant and is based on only the starting amount. The total amount of interest depends on the interest rate, the amount of money borrowed (principal) and the time period for which the money is borrowed. Simple interest is generally charged for borrowing money for short periods (normally used for a single period of less than a year), such as 30 or 60 days. Below is the formula for calculating simple interest is given:Simple Interest = P * R * NWhere,P = Principal (original amount borrowed or loaned)R = Interest rate for one periodN = Number of periods (usually number of years)Here one thing is important that if the Interest rate is given in percentage (%), than it should be divided by 100 and if the time period is given in month than it should be di vided by 12 as a year contains 12 months.The total amount (future value or maturity value) A will be equal to sum of principle and interest.A = P + SIA = P + P * R * NA = P (1+R*N)Suppose one borrows $1,000 for 2 years at 6% simple annual interest.Simple Interest = P * R * N= $ 1000 * 0.06 * 2= $ 120Therefore, the total amount that will be paid after 2 years will be $ 1000+ $120 = $1120.Reference:http://www.bbc.co.uk/scotland/education/bitesize/standard/mathsI/number_gen/interest_rev1.shtml accessed on 9 March 2007.

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