Simple interest

Definition

Simple interest is a method of calculating the interest charge on a loan or financial asset based on the original principal amount. It does not compound, meaning the interest is calculated only on the initial amount.

5 Must Know Facts For Your Next Test

1. The formula for simple interest is $SI = P \cdot r \cdot t$, where $P$ is the principal, $r$ is the rate of interest per period, and $t$ is the time.
2. Simple interest grows linearly over time as opposed to exponentially in compound interest.
3. In applications involving integration, simple interest can be used to understand linear growth models.
4. Unlike compound interest, simple interest does not involve exponential functions or require integration for its calculation.
5. When visualized on a graph, simple interest produces a straight line indicating constant growth.

Review Questions

• What is the formula for calculating simple interest?
• How does simple interest differ from compound interest in terms of growth?
• Why does simple interest produce a straight line when graphed?

Related terms

Compound Interest: Interest calculated on both the initial principal and the accumulated interest from previous periods.

Exponential Growth: A process that increases quantity over time at a rate proportional to its current value, often modeled with $y = y_0 e^{kt}$.

$e$ (Euler's Number): $e$ is an irrational number approximately equal to 2.71828 and serves as the base for natural logarithms and exponential functions.