Simple Interest

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Explanation

Simple interest is earned on the principal only.

Simple interest is not an example of an exponential function. Understanding simple interest, though, will shed light on the understanding of compound interest which is an example of an exponential function.

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Formula

T	Final value of investment
P	Initial value of investment
n	Number of interest periods, usually number of years
r	Percentage rate per interest period, if per year, the annual percentage rate or APR

At start:

T = P

After 1 period:

T = P + Pr = P(1 + 1r)

After 2 periods:

T = P + Pr + Pr = P + 2Pr = P(1 + 2r)

After 3 periods:

T = P + Pr + Pr + Pr = P + 3Pr = P(1 + 3r)

After n periods:

T = P(1 + nr)

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Example calculation

If $200 dollars is invested and earns 8.0% simple interest, what is the final value of the investment after 6 years?

T = P(1 + nr)

T = 200(1 + (6)(0.080))

T = $296

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Calculator for simple interest

T = P(1 + nr)

T	Final value of investment
P	Initial value of investment
n	Number of interest periods, usually number of years
r	Percentage rate per interest period, if per year, the annual percentage rate (APR)

Enter values for the above formula:

(Example: For r enter 5.0% as 0.05, etc.)

P: n: r:

After entering values into the above input areas, click the following 'Calculate' button to get T, the final value of the investment.

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