## Time Value of Money

Self-Paced Overview

### Simple Interest

Simple interest*Simple 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