wealtheducation-what_is_simple

What is Simple Interest?

Simple interest is the value of money over a specific period of time. Simple interest is calculated on the original principal only. Accumulated interest from prior periods is not used in calculations for the following periods. Simple interest is normally used for a single period of less than a year, such as 30 or 60 days.

The calculation for simple interest uses three items: principle, interest rate, and length of time. Principle is the total amount of money borrowed or invested. Interest rate is the percentage rate used to calculate the interest amount. The length of time is the same as the repayment period. The longer the loan is for, the more it will cost in interest.

Simple Interest = p * i * n
where:
p = principal (original amount borrowed or loaned)
i = interest rate for one period
n = number of periods

Example: You borrow $10,000 for 2 years at 5% simple annual interest.
interest = p * i * n = 10,000 * .05 * 3 = 1,000

Example 2: You borrow $10,000 for 60 days at 5% simple interest per year (assume a 365 day year).
interest = p * i * n = 10,000 * .05 * (60/365) = 82.1917

What is Interest Rate?
What is Compound Interest?
What is Interest Rate Swap?