Lesson 3.

2
Simple Interest

Introduction
Simple interest is a method of calculating the interest on
money that is borrowed or loaned

Simple Interest is not typically used when you deal with a bank
or other financial institution

Simple interest is a great way to become familiar with the

concept of interest

Understanding simple interest will help you understand

compound interest

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 Lesson 3.2
Simple Interest

Objectives
You should be able to do the following after completing this lesson.

• Define simple interest, nominal interest rate and period interest rate

• Explain when simple interest is and is not used

• List the common interest calculation periods for simple interest

• Indicate how many times simple interest is calculated each

year for different calculation periods
• Calculate simple interest using both the nominal interest rate
and period interest rate

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 Lesson 3.2
Simple Interest

3.2.1 – Simple interest

In this section, you will learn:

• What simple interest is

• How simple interest is calculated using the formula below

SI = P x R x Y

• What the principal is for a simple interest loan

• What is unique about the principal for a simple interest loan

• What must be repaid to clear a simple interest loan

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 Lesson 3.2
Simple Interest

3.2.2 – When is Simple Interest Used?

In this section, you will learn:

• When simple interest is typically used

• Examples of when simple interest is used

• How you can use simple interest to estimate the

interest for a bank loan

• When simple interest is less than or greater than the

interest for a bank loan

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 Lesson 3.2
Simple Interest

3.2.3 – Specifying Interest Rates

In this section, you will learn:

• How the interest rate for simple interest loans is expressed

• What the nominal interest rate is

• What the period interest rate is
• What the common calculation periods are for simple interest
• How many times the interest is calculated each year for each
calculation period
• Why the calculated interest is the same when using both the
nominal interest rate and the period interest rate

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 Lesson 3.2
Simple Interest

3.2.4 – Calculating Simple Interest

In this section, you will learn:

• How to calculate simple interest using the standard formula

below and the nominal and period interest rates
SI = P x R x Y
• How to determine the number of interest calculation periods
for a simple interest loan
• How to determine how much must be repaid for a simple
interest loan
You will run the following Interactive Example:

• Simple Interest Saving Example

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 Lesson 3.2
Simple Interest

3.2.5 – Benefits of Simple Interest

In this section, you will learn:

• How you should use your knowledge of simple interest

• When simple interest is working for you

• When simple interest is working against you

• What you must do to be financially successful

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 Lesson 3.2
Simple Interest

Discussion Questions

• Will banks and other financial institutions ever begin using

simple interest in their transactions?

• Is it really necessary to understand interest since banks and

other financial institutions always calculated it for you?

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