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Simple interest 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 someone were to receive 5% interest on a beginning value of $100, the first year they would get:
| .05 × $100 – or – $5 in interest |
If they continued to receive 5% interest on the original $100 amount, over five years the growth in their investment would look like this:
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
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