Actually Applicable Application Problems and Brainteasers/Simple Interest

Overview

The simple interest formula is used by banks and lenders routinely to calculate interest payments to be deposited into savings accounts or charged against loan accounts. This is definitely a real application problem in and of itself, as well as the foundation of the compound interest formula which is used to predict growth of accounts over longer periods of time.

General Method

The formula used to calculate simple interest is I=Prt, where the variables mean:

• I: interest
• P: Principal
• r: rate (usually APR, "annual percentage rate")
• t: time (usually in years)

The formula used to calculate the balance of an account after a simple interest payment or charge is A=P+Prt, where the other variables are the same and A means "amount," which is the total value of the account.

Problems

Savings Account

A savings account has $374 in it when it is time for the bank to make its scheduled monthly payment at 2% APR. How much interest will be paid? How much will be in the account afterward?

Credit Card

A credit card user is carrying a balance of $1,347 with an 11% APR. How much will her next monthly interest charge be?

Make Your Own Problem

Open a savings account and ask what the account's APR is. Deposit some money in it and calculate what your next interest payment will be.