Topic Content:
- Meaning of interest
- Simple Interest
Interest:
Interest is a payment made for saving or borrowing money. The extra amount is called interest.
Simple Interest:
A simple interest is an interest calculated on a fixed yearly rate.
Example 1.1.1:
Find the simple interest on a loan of ₦40 000 for 1 year at 5% per annum.
Solution
Yearly interest = \( \scriptsize 5 \% \: of \: N40 000 \\ = \frac{5}{100} \scriptsize \: \times \: N40 000 \\ \scriptsize = N2,000 \)
Simple Interest for 5 years = \( \scriptsize N2,000 \: \times \: 5 \\ = \scriptsize N10,000\)
Alternatively, you can use the formula for simple interest
Simple Interest = \( \frac{Principal \: \times \: Rate \: \times \: Time}{100} \)
Where;
Principal: Is the original amount invested, saved or borrowed. It is also called capital.
Rate: Rate is the percentage of the principal charged for saving or borrowing money.
Time: This is the duration of the investment or saving.
In the example above,
Principal, P = ₦40,000
Rate, R = 5%
Time, T = 1 year
Substitute these values into the formula;
Simple Interest = \( \frac{Principal \: \times \: Rate \: \times \: Time}{100} \)
Simple Interest = \( \frac{40,000 \: \times \: 5 \: \times \: 1}{100}\\ = \frac{400 \: \times \: 5}{1} \\ = \scriptsize N2,000\)
Simple Interest S.I. = \( \frac{PRT}{100} \)
Amount = Principal + Interest
The total amount to be paid by the borrower to the lender is called the Amount.
- In example 1 above, the money borrowed from the lender or the principal is N40,000.
- After one year the interest on the money borrowed was N2,000
- So the money to be paid back by the borrower to the lender after a year will be;
- Amount = Principal + Interest
- Amount = N40,000 + N2,000
- Amount = N42,000
Example 1.1.2:Â
Find the simple interest and amount on ₦10 000 for 2 years at 4% per annum
SolutionÂ
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