Simple Interest Formula

Simple Interest Formula

Simple Interest Formula has been given below. Simple Interest concept has been explained with an example. Simple interest formula can be used in two ways i.e. calculating the amount of interest and calculate the future value of investment.

Simple Interest = P (Rn)

Future Value = P ( 1+ Rn)

Future value is calculated by the following simple formula

R= rate of interest

N = number of period

P = Present value

Simple Interest Formula Example

Bank Offer Simple Interest Rate= 14%

Deposited Amount by Mr. A= 400,000

Calculate Simple interest & Future Value for 2 years?

Solution

In first place we calculate the future value and then we would calculate the interest value. It important to note that interest can either be calculated from the future value or can be directly calculated by a formula.

Future Value Calculation

= $ 400,000 (1+ .14x2)

=$ 400,000 x 1.28

=512,000

Interest Value Calculation

Interest can be calculated in two ways either by calculating future value and then deducting present value from future value or by directly using interest.

Method 1

Interest for 2 Years i.e. (Future Value – Present Value)

512,000 – 400,000 = 112,000

Method 2

Simple Interest = P (Rn)

= 400,000 x (.14x2)

= 400,000 x .28

=112,000

Characteristics of Simple Interest

1.    Interest Rate remains same for each year

2.    Simple interest is calculated only on the principal amount

3.    No interest is calculated or paid on interest earned.

4.    Simple Interest can be paid periodically and on maturity

 Simple Interest Vs Compound Interest

Simple interest remains same for all period, where compound interest changes each year (increased with each passing year). Simple interest in only calculate on the bases of principal amount, where compound interest takes into account both principal and interest already earned on principal amount.

Period or number of period has great significance in the compound interest, where in case of simple interest number of period has no significance. Simple interest concept can be used both for annual or periodical payment, where compound interest concept is only valid for maturity payment.