The Mathematics of Money

8 Chapter 1 Simple Interest

meantime, though, we will do a bit of sweeping under the rug and simply not worry about

the reason for the addition of the word simple.

Now, back to the formula. This formula is just a shorthand way of reminding us of what

we’ve already observed: to calculate simple interest, multiply the principal times the rate

as a decimal times the time. The formula summarizes that idea and also gives us a useful

framework to help organize our thoughts when solving these types of problems. An example

will illustrate this well.

Example 1.1.11 Heather borrows $18,500 at 5^7 ⁄ 8 % simple interest for 2 years. How

much interest will she pay?

The principal P  $18,500, the interest rate R  0.05875, and the time T  2 years. So we

begin with our formula:

I  PRT

Replace each letter whose value we know:

I  ($18,500)(0.05875)(2)

And then follow the formula’s instruction and multiply:

I  $2,173.75

The formula now tells us that I, the amount of interest, is $2,173.75.

Loans in Disguise

Sometimes interest is paid in situations we might not normally think of as loans. If you

deposit money in a bank account, you probably expect to be paid interest, even though

Even though we don’t usually
think of it this way, a deposit is
a loan. © Keith Brofsky/Getty
Images/DIL