Simple Interest

A 2-year loan of $500 is made with 4% simple interest. Find the interest earned.

Solution & Answer

Always take a moment to identify the values given in the problem. Here we are given:

Time is 2 years: t=2

Initial amount is $500: P=500

The rate is 4%. Write this as a decimal: r=0.04

Now apply the formula:

I=Prt=500(0.04)(2)=40

Answer: The interest earned is $40.

A total of $1,200 is invested at a simple interest rate of 6% for 4 months. How much interest is earned on this investment?

Solution & Answer

Before we can apply the formula, we will need to write the time of 4 months in terms of years. Since there are 12 months in a year:

t=412=13

With this adjusted to years, we can now apply the formula with P=1200 and r=0.06.

I=Prt=1200(0.06)(13)=24

Answer: The interest earned is $24.

A business takes out a simple interest loan of $10,000 at a rate of 7.5%. What is the total amount the business will repay if the loan is for 8 years?

Solution & Answer

The total amount they will repay is the future value, A. We are also given that:

t=8

r=0.075

P=10000

Using the simple interest formula for future value:

A=P(1+rt)=10000(1+0.075(8))=16000

Answer: The business will pay back a total of $16,000.