What is simple interest

Simple interest is a financial concept used to calculate the amount of interest earned or paid on a principal amount of money over a given period of time. It is called "simple" because it is based on a straightforward formula and does not take into account compounding of interest.

To calculate the simple interest, you need three pieces of information: the principal amount (P), the interest rate (R), and the time period (T).

The formula for calculating simple interest is:
Simple Interest = (Principal × Interest Rate × Time) / 100

Here's how to use the formula:

1. Determine the principal amount. This is the initial amount of money that is either deposited or borrowed.

2. Identify the interest rate. This is expressed as a percentage. For example, an interest rate of 5% would be written as 0.05.

3. Determine the time period. This is the duration for which the interest is calculated, usually measured in years.

4. Plug the numbers into the formula. Multiply the principal amount by the interest rate and the time period, then divide by 100 to get the simple interest.

For example, let's say you deposit $1,000 in a savings account that offers an annual interest rate of 4% for 3 years. Using the formula, the calculation would be:
Simple Interest = ($1,000 × 0.04 × 3) / 100
Simple Interest = $120

So, in this example, you would earn $120 in simple interest over the 3-year period.