Simple Interest

Simple interest is the interest calculated on a principal sum. Principal is the sum of money invested in
to, or borrowed from an institution, denoted as P. The money earned by an invested principal is called
interest, and the money charged for borrowing a principal amount from an institution is also called
interest, denoted as I. The amount of interest earned or charged per year is expressed as a percentage
and is known as the rate of interest, denoted as R. The length or period of the loan or investment is call
the time and is denoted by T. When using T in the calculation it must be in years. The amount accruing
(increasing over time) is denoted by A.
𝑃𝑅𝑇
I=
100
A=P+I

Questions

1. A person invested $5000 in a bank at 10% per annum for 4 years. What is the simple interest
earned?

2. A person borrows $12000 from a bank at 15% per annum for 3 years. Determine the sum of each
monthly payment.

3. The simple interest on an investment of $40 000 for 3 years amounted to $6 000. What rate of
interest was paid?

4.
Compound Interest

If the interest earned or paid on investments is added to the principal at given intervals, then the
interest is said to be compounded over the time-period. This type of interest is called compound
interest.

Compound Interest becomes tedious, especially if the values of principal, time and rate are fractional
values. When the period of the loan or the investment is over a long period, it is wise to use a formula to
calculate the compound interest. The sum of money earned or paid at the end of the transaction is
called the amount (A). The difference between the amount and the principal (P) is called the compound
interest.
𝑹 𝒏
A = P (𝟏 + 𝟏𝟎𝟎
)

C.I. = A – P

Questions

1. Calculate the compound interest earned on the sum of $1 000 at the rate of 10% per annum over a
period of three (3) years.
2. Calculate the compound interest on $6 000 if invested for 3 years at 7 ½ % per annum.
Depreciation

In transactions involving Compound Interest, the amount invested grows each year and, in this sense,
money invested in compound interest appreciates. Some investments decrease in value over time
because of age or use and these are examples of depreciation.

𝑹 𝒏
A = P (𝟏 − 𝟏𝟎𝟎
)

D=P-A

Questions
1. An item of furniture, originally valued at $1 000, depreciates by 10% each year. What is its expected
value after two (2) years?