How can we use the concept:
We can use this concept to understand one of the ways interest is commonly calculated for loans or investments.
Simple Interest Formula: P(1+ rt) = A
P = initial principal balance
r = annual interest rate
t = time (in years)
A = final amount
Sample Math Problems
1. Lexxie bought a car for $20,000 at 4% interest with a loan term of 5 years. Using the Simple Interest formula, we find that Lexxie will owe $800 per year for interest which equates to a total of $4,000 over the term of the loan.
Solution:
P(1+ rt) = A
P(1+ rt) = A
$20,000 (1 + .04x5) = A
$20,000 (1 + .2) = A
$20,000 (1.2) = A
$24,000 = A
$20,000 (principal) + $4,000 (simple interest)
$4,000 (total interest) ÷ 5 (number of years) = $800 (yearly interest)
2. Lemmie bought a new washing machine, dryer, and refrigerator for his home. After his cash down payment, he financed a total of $3,000.00 at 6% interest for 3 years. Using the SImple Interest formula, we find that Lemmie owes a total of $540.00 in interest charges. Per year that total is $180.00.
Solution:
P(1+ rt) = A
$3,000(1 + .06 x 3) = A
$3,000(1 + .18) = A
$3,000(1.18) = A
$3540 = A
$3,000 (Principal) + $540 (Simple Interest)
$540 (total interest) ÷ 3 (number of years) = $180 per year
3. Lemmie put $5,000.00 in a CD at the bank with 3.2% interest per year. Calculate the interest.
Solution:
P(1 + rt) = A
$5,000.00 (1 + .032) = A
$5,000 ( 1.032) = A
$5,160 = A
$5,000 (principal) + $160 (simple interest)
