With simple interest, interest is earned (charged) only on the amount lent (borrowed).
P
=
principal
the
amount lent or borrowed
i = the interest rate
n = the number of years
A
= the
future value
the
amount received or due at the end of n years
i(n)(P) = interest on lending or borrowing
A = P + P (i) (n)
A = P [1+(i)(n)] The P is factored out.
Example 1
$12,000 is borrowed at a rate of 9 %. How much is owed after n years?
A = 12,000 (1+.09n)
The independent variable is n, the length of the loan. The dependent variable is A, the amount which must be repaid.
Example 2
You borrow $3,200 and want to pay it back in a lump sum after 4 years. How much will you have to pay if you are being charged 8% simple interest?
A = 3,200 [1+.08(4)]
A = 4,224
How much will you have to pay if you are being charged 10 % simple interest?
A = 3,200 [1+.10(4)]
A = 4,480
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