Simple Interest | Numbers | Maths | FuseSchool

Summary

This video explains the concept of simple interest, which is the amount charged by a lender to a borrower or paid to a depositor by a bank. It clarifies how simple interest is calculated by multiplying the principal, interest rate, and time period. The video includes practical examples to demonstrate how to calculate simple interest and highlights the importance of understanding it. Although the video focuses on simple interest, it briefly introduces compound interest, which is more commonly used by banks. The video aims to make simple interest easy to grasp and provides helpful tips for calculation.

Takeaways

• 😀 Interest is the amount charged by a lender to a borrower, or paid by a bank to someone with a savings account.
• 😀 Simple interest is a fixed amount paid or received each year, calculated by multiplying the principal amount, interest rate, and time period.
• 😀 Simple interest does not change over time; it's the same amount every year.
• 😀 In the example, a 4% interest on a £2,000 loan over 5 years results in £400 of simple interest.
• 😀 To calculate simple interest: Multiply the principal, interest rate, and time period together.
• 😀 If money is not left in a bank account for a full year, interest is calculated as a fraction of the full amount.
• 😀 For partial years, the interest is worked out based on the fraction of the year the money is deposited.
• 😀 If the question asks for the total amount in an account after a number of years, add the interest to the original amount.
• 😀 The simple interest formula is: Interest = Principal × Rate × Time.
• 😀 Banks typically use compound interest instead of simple interest, which will be discussed in a future video.
• 😀 Always remember to pause and solve practice problems to reinforce understanding of simple interest calculations.

Q & A

What is interest in the context of borrowing and saving money?

Interest is the amount charged by a lender to a borrower. If you borrow money from a bank, you'll need to pay back more than you borrowed. Conversely, if you deposit money into a savings account, the bank will pay you interest as a reward for lending them your money.

Why is it important to know the difference between types of interest?

Understanding the difference between types of interest is important because it affects how much money you need to repay when borrowing or how much you earn when saving.

What is simple interest?

Simple interest is when you pay or receive the same amount of interest every year. It's calculated by multiplying the principal amount, interest rate, and time period together.

How do you calculate simple interest?

To calculate simple interest, multiply the principal (the amount you borrowed or invested), the interest rate, and the time period. For example, if the interest rate is 4% on £2,000 for 5 years, the simple interest is £400.

How much simple interest would you pay on a £2,000 loan at 4% for 5 years?

The simple interest would be £400. This is calculated by multiplying £2,000 by 4% (0.04), and then multiplying that by 5 years.

What happens if the money isn't left in a bank account for a full year?

If money is not left in the bank account for a whole year, only a fraction of the total simple interest is paid. For example, if it's only in the account for 3 months, you would receive 3/12 of the total interest.

What is the formula for simple interest?

The formula for simple interest is: Simple Interest = Principal × Interest Rate × Time. However, it's often easier to just calculate the interest directly rather than trying to remember the formula.

How would you calculate simple interest for a fractional time period, such as 3 months?

To calculate simple interest for a fractional time period, first calculate the total interest for a full year, and then take the appropriate proportion of it. For example, for 3 months, you would receive 3/12 of the full year's interest.

Why do banks usually prefer compound interest over simple interest?

Banks prefer compound interest because it results in a higher amount of interest being earned or paid over time, due to interest being calculated on both the principal and the accumulated interest.

What will be covered in future videos related to interest?

Future videos will cover compound interest in more detail, which is the type of interest typically used by banks rather than simple interest.