Business Math – Finance Math (1 of 30) Simple Interest

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Welcome to lectern line our first topic in finance math is going to be simple interest so what we mean by simple interest well it’s the type of interest that’s not found very much anymore because you don’t earn as much as when you have compounded interest but it’s still a concept we need to understand so before we do that let’s go over some basic concepts here p

Stands for principal principal is the initial amount of money that you will invest so if you have a thousand dollars you want to put in the bank you don’t know a lot of money these days but there was a time where we earned a fair amount of money in the bank you want to put in the bank to earn some interest that’s your principal that’s your principal investment

Interest is the amount of money that you get in return for that the bank will pay you money and that’s called interest you will earn interest and so the units for interest is dollars not to be confused with the interest rate we’ll get to that in just a moment a stands for accumulated amount the total amount that you end up with will be the initial principal you put

In the bank plus whatever interest you earn on top of that so the two combined will form the accumulated amount so the more interest you earn the bigger the accumulated amount which is added to the initial principal investment that you made next is called our four rate that’s called the interest rate usually expressed in percent or in decimal so that’s how fast

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You’ll be accumulating interest it’s based upon the rate and of course about how much you invest as well but if the rate is high ulam you’ll get more interested in the rate is slow you’ll get less interest so usually it’s like 1% or 2% or 3% so for every year that you put your money in the bank that will give you some money back and it’s in terms of what percent of

Your principal will they pay you and that’s called the rate and finally the time and usually it’s expressed in years how long will you put your investment in the bank if you put it in for one year you’ll earn interest for a year if you put in for two years you’ll interest for two years simple as in simple interest means that you put it in and then at the end of the

Period that will give you the interest and it will not pay you interest on the interest that you’re earning along the way that’s the difference between simple interest and compounded interest so if you leave it in for three years years after three years they’ll say well you turned in you put in a thousand dollars in the bank you get this rate and after three years

To get this much money and they don’t pay you on the interest that you’re earning while the money is in the bank it’s not as lucrative so therefore the compounded interest rate is the one that’s most used most most of the time used because it is a more advantageous way of earning money we’ll get to that in a later video so definition of interest mathematically the

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Amount of money that you get back for investing your principal it’s equal to the principal you invest times the rate at which is invested at times the amount of time that you leave it in the bank or in the investment so it’s principal times rate times time will give you interest earned the result is in dollars the accumulated amount is the amount that you end up with

At the end which is equal to the principal you invested which of course you’ll get back plus any interest that you earned and since the interest that we earned is going to be equal to prt from our definition we can then factor out a p the principal so that means the amount the accumulated amount will be the principal times the quantity one for the initial principal

Plus the rate times the time alright so here’s an example here let’s say that we’re going to invest two thousand dollars at five percent interest rate and we do it for three years but it’s simple interest which means that the interest that you’ll earn i which is equal to the principal times the rate times the time which is going to be equal to two thousand dollars

Times the rate which is five percent so that will be 0.05 times the time which is three years so what is the total amount let’s see here five percent on two thousand dollars is that would be a hundred dollars times three so that would earn you three hundred dollars after three years after three years you would get your two thousand dollars back they will pay an

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Additional two three hundred dollars so what would be the accumulated amount so since the accumulated amount is equal to the principal plus interest so in this case the principal will be two thousand dollars that’s the initial investment plus the three hundred dollars that you earn an interest after three years which is equal to two thousand three hundred dollars

Which will be the accumulated amount that you’ll end up with after three years okay so quick check let’s stand up 100 times three three hundred that looks correct so that’s the concept of simple interest it’s very straightforward this is how you see how you calculate the interest earned what we mean by accumulated amount and then here’s a nice little example to show you how to do that

Transcribed from video
Business Math – Finance Math (1 of 30) Simple Interest By Michel van Biezen