Interest Problems

Interest is the cost of borrowing money or the reward for saving money. It is a fundamental concept in finance and economics, and it plays a significant role in everyday financial decisions, like taking loans, saving money in a bank, or investing.

Key Terms:

1. Principal (P): The original amount of money invested or borrowed.
2. Rate (R): The percentage at which the interest is calculated, usually per year.
3. Time (T): The duration for which the money is invested or borrowed, typically measured in years.
4. Interest (I): The additional amount earned or paid on the principal over a certain period.

Types of Interest:

1. Simple Interest: Calculated only on the principal amount. It does not compound, meaning it stays the same each period.
2. Compound Interest: Calculated on the principal and also on the accumulated interest of previous periods. It grows faster because it compounds over time.

Simple Interest Formula:

The formula for calculating simple interest is:

I = (P) (R) (T)

Where:

• I = Interest earned or paid
• P = Principal amount
• R = Rate of interest (as a decimal, so 5% would be 0.05)
• T = Time in years

Example Problem:

Problem:
Anna invested ₱10,000 at an annual interest rate of 5% for 3 years. How much interest will she earn?

Solution:

1. Identify the values:

   • Principal (P) = ₱10,000
   • Rate (R) = 5% = 0.05
   • Time (T) = 3 years

2. Substitute into the formula:

   I = 10,000 × 0.05 × 3

   I = 10,000 x 0.15 = 1,500

Answer: Anna will earn ₱1,500 in interest after 3 years.