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Simple Interest Formula
The simple interest formula relates four quantities associated with borrowing or investing money:
where
- = the amount of interest (earned on an investment or owed on a loan),
- = the principal (the original amount of money invested or borrowed),
- = the annual interest rate expressed as a decimal (not as a percent),
- = the time the money is invested or borrowed, measured in years.
Because the rate must be in decimal form, a percent such as is first converted to before being substituted into the formula. To apply this formula in a word problem, identify which three of the four quantities are given, substitute them into , and solve for the remaining unknown using basic algebra. For example, to find the interest earned on a investment at annual interest for years, substitute , , and to obtain , so the interest is . This formula models situations in which the interest is computed only on the original principal and does not compound.
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