Simple interest is a basic concept in finance that helps determine the amount of money earned or paid on a principal amount over a specific time period. It is a straightforward method of calculating interest, which is a fee or cost for borrowing money or the earnings generated from an investment.
The formula for calculating simple interest is:
Interest = (Principal × Rate × Time)/100
In this formula, the principal refers to the initial amount of money, the rate represents the interest rate per time period, and the time indicates the duration for which the money is borrowed or invested.
For example, let’s say you borrow $1,000 from a friend at an annual interest rate of 5% for a period of 2 years. Using the simple interest formula, the interest earned can be calculated as follows:
Interest = $1,000 × 0.05 × 2 = $100
Therefore, in this case, you would owe your friend $1,100 at the end of the 2-year period.