Simple interest
What is simple interest?
Simple interest is the value that is generated on the amount of a invariable capital and that is applied on an investment or a credit. It is called simple because it is calculated only on the value of the initial capital.
This concept is applicable to calculate how much is earned on an investment or savings, as well as to calculate how much is paid on a loan or credit.
Its main characteristic is that the calculated interest always remains invariable in each time range without modification. Likewise, the value of this interest is always calculated on the same initial capital base, which is not modified throughout the duration of the credit or investment.
Below you can see an example of these concepts where the behavior of a capital of $ 800 with an interest rate of two%, during 5 time periods:
| Period | Capital value | Monthly interest rate | Simple interest calculation | Simple interest for the period |
|---|---|---|---|---|
| 1 | $ 800 | two% | (800 x 2%) = $ 16 | $ 16 |
| two | $ 800 | two% | (800 x 2%) = $ 16 | $ 16 |
| 3 | $ 800 | two% | (800 x 2%) = $ 16 | $ 16 |
| 4 | $ 800 | two% | (800 x 2%) = $ 16 | $ 16 |
| 5 | $ 800 | two% | (800 x 2%) = $ 16 | $ 16 |
In the previous graph we can see that the value of the principal and the interest remain the same in each period of time.
Formulas for calculating simple interest
The general formula for calculating simple interest is as follows:
The variables that involve the previous formula are:
- Capital (C): original amount of the security delivered as a loan.
- The interest rate (i): of the period, expressed in decimal form.
- Time
To apply the above formula, it must be taken into account that the interest rate and the number of periods must be expressed in the same unit of time.
In cases where the interest rate and the number of periods are not expressed in the same unit of time, a conversion must be performed. The formulas are as follows:
- Cup of annual interest, but with time expressed in months:
- Annual interest rate, but with time expressed in days:
Simple interest and compound interest
The main differences that we can find between simple and compound interest are the following:
- The simple interest It is calculated on the value of the initial capital, which remains unchanged. In the compound interest the value of the capital varies, constantly increasing due to the addition of the interests that are calculated in each period.
- In the simple interest the interests are not capitalized, that is, they do not generate more interest. In the compound interest, on the other hand, Yes; interest is compounded and in turn generates more interest.
- The simple interest does not add to the capital while the compound interest it is added to the capital of each period.
- In the simple interest the interests are calculated in each simple period. These are the same and do not show variations. In the compound interest, the calculated interest varies and increases accordingly in each period.
As an example, let's see how the two interests behave for the same capital value:
| Simple interest | |||
| Period | Capital value | Interest rate | Simple interest for the period |
| 1 | $ 800 | two% | $ 16 |
| two | $ 800 | two% | $ 16 |
| 3 | $ 800 | two% | $ 16 |
| 4 | $ 800 | two% | $ 16 |
| 5 | $ 800 | two% | $ 16 |
| Compound interest | |||
| Period | Capital value | Interest rate | Complex interest of the period |
| 1 | $ 800 | two% | $ 16.00 |
| two | $ 816 | two% | $ 16.32 |
| 3 | $ 832 | two% | $ 16.65 |
| 4 | $ 848 | two% | $ 16.98 |
| 5 | $ 865 | two% | $ 17.32 |
Simple Interest Calculation Examples
Example 1
The company Scandina Enterprises received a new free investment loan for a value of $ 7,800 and must pay simple interest at a rate of 25% per annum for 3 years. How much is the value that you must pay for interest?
Answer: the amount to be paid for simple interest that the company must pay during the 3 years is $ 5850.
Example 2
The company Scandina Enterprises received a new free investment loan for a value of $ 5,000 and must pay simple interest at a rate of 2% per month for 24 months. How much is the value that you must pay for interest?
Answer: the amount to be paid for simple interest that the company must pay during the 24 months is $ 2,400.
Example 3
The company Scandina Enterprises received a new free investment loan for $ 7,800 and must pay simple interest at a rate of 25% per year for 36 months. How much is the value that you must pay for interest?
Answer: the amount to be paid for simple interest that the company must pay during the 36 months is $ 5,850.
Example 4
The company Scandina Enterprises received a new free investment loan for a value of $ 7,800 and must pay simple interest at a rate of 25% per annum for 1,080 days. How much is the value that you must pay for interest?
Answer: the amount to be paid for simple interest that the company must pay during the 1,080 days is $ 5,850.
| Bibliography: |
|---|
|
Leave a Reply