How to Calculate Simple Interest

What is Simple Interest?

Simple interest is a basic concept important to investments such as short-term notes or Treasury bills (T-bills), which typically cover time periods less than a year, but also longer term investments such as municipal or other types of bonds.

The investor invests a principal amount of money at a fixed interest rate, without compounding.

At the maturity date, the investor gets the principal back, plus the interest.

How to Calculate Simple Interest

To calculate the amount of simple interest, we can use the simple interest formula and multiply the principal amount with the annual interest rate and the time in years.

Simple interest formula: Interest amount equals principal amount, times annual interest rate, times the time in years
Simple interest formula: I = P r t

Example Simple Interest Calculation

Question: What is the interest on a loan of $1,000 at 11% for 10 months?

Answer:

I = P r t = $1,000 * 0.11 * 10/12 = $91.67

At the end of the 10 months, the borrower will pay the principal, $1,000, plus the interest, $91.67, for a total of $1,091.67.

Simple Interest and Future Value

Building on the simple interest equation above, we can express the total amount, or future value (A) to be paid back to the investor as follows:

Future value calculation with simple interest: Future value = principal amount times, open bracket, one plus annual interest rate times time in years, close bracket.
Future value calculation with simple interest: A = P(1 + rt)

Example Future Value Calculation

Question: What is the total amount due on a loan of $1,400 at 8% simple interest at the end of 6 months?

Answer:

A = P (1 + rt) = $1,400 * (1 + 0.08 * 6/12) = $1,456.00

The total amount due at the end of 6 months is $1,456.00.

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