Business Math 01 - Calculating Interest Per Year

First off, do you remember what interest is? Interest is additional money earned on money that is either borrowed or that is in savings. When you put money in the bank and let it sit there, the bank can freely use your money to make investments for the bank and the community.

Because you are allowing the bank to use your money, they give you a little extra back in the form of interest. In the same regard, if you need a loan from a bank or any other lender, including credit cards, they give you money to use and in return, you give them back a little extra in interest. It’s fun getting interest payments but not so fun having to pay interest payments. When you buy something on borrowed money, you always pay a lot more for what you bought so learning how interest accumulation works might help you make more informative decisions on whether or not what you want is really worth paying so much more for.

The base point of money that is sitting in a savings account or that has been borrowed is known as the principal. The interest charged or paid on that principal amount will either be simple interest or compound interest. For this quiz you will revisit calculating simple interest.

If you can remember back to your Consumer Math, when calculating interest there is a simple, basic formula that needs to be followed in order to determine how much interest you will make or how much interest you will have to pay back on top of the principal amount. That formula was:

I = PRT (interest equals principal, interest rate and time)

Let’s look at an example problem on how to work the problem of determining the interest. We will start with a principal balance left in a savings account. The principal is $4,500.00. The interest earned per year is 9.5% and it will earn that for the next 6 years. How much interest will be earned in 6 years?

Working the problem:
$4,500.00 at 9.5% for 6 years.
I = PRT
4500 x 0.095 x 6
4500 x 0.095 = 427.5
427.5 x 6 = 2,565
I = $2,565.00

If you do not touch the balance above, after 6 years you will have a total of $7,065.00! Not bad! On the other hand, if you had borrowed the $4,500.00 at 9.5% for 6 years, instead of paying back the lender $4,500.00, you will pay the lender $7,065.00 for the principal and the extra money for the privilege of being able to use the money. Not so good but part of business math.

Now let’s see what you remember about calculating interest. For each of the following problems, calculate how much interest will be paid out by the end of the term (time period) mentioned.