SIMPLE INTEREST CACULATION AND NUMERICAL EXAMPLES WITH SAMPLE MCQs QUIZ

Simple interest in Financial Mathematics (slideplayer)

Simple interest

Simple interest is a method of calculating the interest on a loan or an investment, where the interest charged is based only on the original amount borrowed or invested, and not on the accumulated interest. The formula for simple interest is:

I = P * r * t

Where:

I = Interest

P = Principal (original amount borrowed or invested)

r = Interest rate

t = Time (duration of the loan or investment)

It is important to note that simple interest is only used in certain situations, and is typically less favorable than compound interest, where the interest is calculated on both the principal and the accumulated interest.

EXAMPLE PROBLEMS FROM SIMPLE INTEREST

1. A $1000 loan is taken for 2 years at an interest rate of 5%. What is the total interest paid over the 2 years?

Answer: The interest paid would be $1000 * 5% * 2 = $100

2. If a $5000 investment earns 8% simple interest per year, how much interest will be earned after 3 years?

Answer: The interest earned would be $5000 * 8% * 3 = $1200

3. An investment of $8000 earns a simple interest rate of 6% per year for 4 years. What is the total interest earned?

Answer: The interest earned would be $8000 * 6% * 4 = $1920.

4. A loan of $3000 is taken for 1 year at an interest rate of 10%. What is the total interest paid for the loan?

Answer: The interest paid would be $3000 * 10% * 1 = $300

5. If a $2000 investment earns a simple interest rate of 5% per year, how much interest will be earned after 2 years?

Answer: The interest earned would be $2000 * 5% * 2 = $200.

6. If you deposit $1,000 at an interest rate of 5% per year for 2 years, how much interest will you earn?

Answer: $100 (1000 x 0.05 x 2)

7. If you borrow $5,000 at an interest rate of 8% per year for 3 years, how much total interest will you have to pay?

Answer: $1,200 (5000 x 0.08 x 3)

8. What is the simple interest on $2,000 for 1 year at a rate of 7%?

Answer: $140 (2000 x 0.07 x 1)

9. If you have a $10,000 loan with a simple interest rate of 6% for 4 years, how much will you owe after 4 years?

Answer: $12,400 (10000 + (10000 x 0.06 x 4))

SOLVE EXAMPLE QUESTION

1. What is the formula to calculate simple interest?
2. How do you find the principal amount given the interest and time?
3. If the interest rate is 5% and the time period is 2 years, what will be the interest on a principal of $1000?
4. How does the principal affect the amount of interest earned?
5. Can you explain how to calculate simple interest for a non-uniform rate of interest?
6. What is the difference between simple interest and compound interest?
7. How does the time period affect the amount of interest earned in simple interest calculation?
8. If the interest earned on a certain principal is $100, what is the rate of interest if the time period is 1 year?
9. Can simple interest be negative? If yes, under what conditions?
10. What is the formula to calculate the total amount (principal + interest) in simple interest calculation?

ANSWER:

1. The formula to calculate simple interest is: I = P * R * T, where P is the principal, R is the interest rate and T is the time period in years.

2. To find the principal amount, the formula can be rearranged as: P = I / (R * T).

3. The interest on a principal of $1000 with an interest rate of 5% and a time period of 2 years would be 1000 * 5 * 2 / 100 = $100.

4. The amount of interest earned is directly proportional to the principal amount, meaning the higher the principal, the higher the interest earned.

5. To calculate simple interest for a non-uniform rate of interest, the interest rate for each period of time must be determined and multiplied by the principal for that period. The sum of all these interest amounts will give the total interest earned.

6. Simple interest is calculated only on the principal amount, whereas compound interest is calculated on the principal as well as accumulated interest. Compound interest results in a higher amount than simple interest over a longer period of time.

7. The time period has a direct impact on the amount of interest earned in simple interest calculation. A longer time period results in a higher interest earned and vice versa.

8. If the interest earned on a certain principal is $100, the rate of interest can be calculated using the formula: R = I / (P * T). Substituting the values, R = 100 / (1000 * 1) = 10%.

9. Simple interest cannot be negative, but the total amount (principal + interest) may be less than the principal if the interest rate is negative.

10. The formula to calculate the total amount (principal + interest) in simple interest calculation is: A = P + I = P + (P * R * T).

EXAMPLE QUESTION

What is the formula for calculating simple interest?
How does the interest rate affect the amount of interest earned on an investment?
If you invested $1000 for 5 years at a 4% interest rate, how much total interest would you earn?
How do you calculate the maturity value of a simple interest investment?
Can you convert simple interest to compound interest? If so, how?
How do you determine the principal amount given the interest rate, time period, and interest earned?
Can simple interest be negative? If so, under what circumstances?
How does the time period affect the amount of interest earned on an investment?
If you invested $500 for 2 years at a 6% interest rate, what would be your interest earnings?
Can simple interest be calculated on a daily or monthly basis? If so, how?