How much interest would Pete pay in a year for his loan of $300 if the interest rate is 15%?

Before you get started, take this readiness quiz.

Solve 0.6y = 45. If you missed this problem, review Example 5.7.4.

Solve n1.45 = 4.6. If you missed this problem, review Example 5.7.5.

Use the Simple Interest Formula

Do you know that banks pay you to let them keep your money? The money you put in the bank is called the principal, P , and the bank pays you interest, I . The interest is computed as a certain percent of the principal; called the rate of interest, r . The rate of interest is usually expressed as a percent per year, and is calculated by using the decimal equivalent of the percent. The variable for time, t, represents the number of years the money is left in the account.

Definition: simple interest

If an amount of money, P , the principal, is invested for a period of t years at an annual interest rate r, the amount of interest, I , earned is

I=Prt

where

I = interest

P = principal

r = rate

t = time

Interest earned according to this formula is called simple interest.

The formula we use to calculate simple interest is I = Prt. To use the simple interest formula we substitute in the values for variables that are given, and then solve for the unknown variable. It may be helpful to organize the information by listing all four variables and filling in the given information.

Example 6.4.1

Find the simple interest earned after 3 years on $500 at an interest rate of 6%.

Solution

Organize the given information in a list.

I = ?, P = $500, r = 6%, t = 3 years

We will use the simple interest formula to find the interest.

step-by-step explanation:

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