Simple Interest Formula
The formula for calculating simple interest is:
I = P × R × T
Where:
- I = Simple Interest
- P = Principal (the initial amount of money)
- R = Rate of Interest (in percentage per annum)
- T = Time (in years)
And the total amount is:
A = P + I
Where:
- A = Total Amount
- P = Principal
- I = Simple Interest
Simple Interest Examples
Example 1: Calculate Interest on Savings
If you deposit ₹10,000 in a bank account that pays 5% simple interest per year, how much interest will you earn after 2 years?
- Principal (P) = ₹10,000
- Rate of Interest (R) = 5% = 0.05
- Time (T) = 2 years
- Simple Interest (I) = P × R × T = 10,000 × 0.05 × 2 = ₹1,000
- Total Amount = P + I = ₹10,000 + ₹1,000 = ₹11,000
Example 2: Calculate Time Period
How long will it take for an investment of ₹20,000 to earn ₹3,000 in simple interest at 6% per annum?
- Principal (P) = ₹20,000
- Rate of Interest (R) = 6% = 0.06
- Simple Interest (I) = ₹3,000
- Time (T) = I / (P × R) = 3,000 / (20,000 × 0.06) = 3,000 / 1,200 = 2.5 years
Applications of Simple Interest
- Savings Accounts: Many banks offer simple interest on savings accounts.
- Fixed Deposits: Some short-term deposits may use simple interest calculations.
- Personal Loans: Certain loans, especially short-term ones, may use simple interest.
- Treasury Bills: Government securities often use simple interest for short durations.
- Discounting Bills: Simple interest is used in discounting bills of exchange.
Simple Interest vs. Compound Interest
Simple interest is calculated only on the initial principal, while compound interest is calculated on the principal plus accumulated interest. For long-term investments, compound interest generally results in higher returns compared to simple interest.