Time Value of Money
Self-Paced Overview
Simple Interest
Simple interestSimple Interest:Interest that is paid on beginning principal only. is a topic that most people cover in elementary school. Interest may be thought of as rent paid on borrowed money. Simple interest is calculated only on the beginning principal.
For instance, if one were to receive 5% interest on a beginning value of $100, the first year interest would be:
$100 × .05– or –$5 in Interest
Continuing to receive 5% interest on the original $100 amount, over five years the growth of the original investment would look like:
Year 1: 5% of $100 = $5 + $100 = $105
Year 2: 5% of $100 = $5 + $105 = $110
Year 3: 5% of $100 = $5 + $110 = $115
Year 4: 5% of $100 = $5 + $115 = $120
Year 5: 5% of $100 = $5 + $120 = $125