EDEXCEL GCSE FOUNDATION MATHS - What is Simple Interest

Edexcel GCSE Foundation Maths - What is Simple Interest?

Introduction

Simple interest is a way of calculating the interest earned on an investment or loan. It is a fixed percentage of the original principal amount. Unlike compound interest, simple interest is only calculated on the original principal amount, not on any accrued interest.

Formula

The formula for simple interest is:

Simple Interest = (Principal x Rate x Time) / 100

Where:

• Principal: The original amount invested or borrowed.
• Rate: The interest rate per year, expressed as a percentage.
• Time: The time period for which the interest is calculated, in years.

Example

Let's say you invest £1000 at a simple interest rate of 5% per year for 3 years.

• Principal: £1000
• Rate: 5%
• Time: 3 years

Simple Interest = (1000 x 5 x 3) / 100 = £150

Therefore, the simple interest earned after 3 years would be £150.

Calculating Total Amount

To calculate the total amount (principal + interest) after a certain time period, use the following formula:

Total Amount = Principal + Simple Interest

In our example, the total amount after 3 years would be:

Total Amount = 1000 + 150 = £1150

Key Points

• Simple interest is calculated only on the original principal amount.
• It is a fixed percentage of the principal amount.
• The longer the time period, the more interest you will earn.
• The higher the interest rate, the more interest you will earn.

Practice Problems

1. Calculate the simple interest on a loan of £5000 at a rate of 8% per year for 2 years.
2. If you invest £2000 at a simple interest rate of 4% per year, how much interest will you earn after 5 years?
3. A bank offers a simple interest rate of 3% per year on a savings account. If you deposit £1500, what will the total amount in your account be after 4 years?

Understanding Simple Interest

Simple interest is a straightforward concept that is important for understanding financial calculations. It is used in various financial contexts, including loans, investments, and savings accounts. By understanding how simple interest works, you can make informed financial decisions.