Section 1
1. Section 1
1.6. Explore
Section 1: Simple and Compound Interest
Explore
Did You Know?
Charging interest on loans has been around for thousands of years. The ancient Babylonians and Romans limited the amount of interest charged. Rates were limited to between 25% and 50% for loans of grain or precious metals.
At about 1000 CE in Indochina, loans of rice were charged interest of 50% payable at the time of the next harvest.
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In Discover you may have noticed that simple interest calculations depend on three factors:
- The first factor is the amount borrowed or invested. This amount is called the principal.
- A second factor determining interest is the interest rate. Banks advertise the interest rate as an annual rate—the rate charged or earned for one year.
- A third factor is the term or time, expressed in years, of the loan or investment.
In Discover you used these factors to help develop a formula for simple interest. The formula may have looked similar to the following one. Roll-over the formula to identify the variables.
I = Prt 
Watch Marty’s Notebook to see how the simple interest formula can be used. Access this applet by clicking on the play button. Notice the extra step required when the time given is in months.
To find the total amount of money an investment is worth, the principal and all the interest made must be added together.
You may have noticed that this formula was used in the final step in the example you just watched. You will see this formula used again at the end of question 1 of Self-Check 1.
P = the principal or original amount invested
r = annual interest rate in decimal form
t = the term, or time in years