How is simple interest calculated?

Simple interest is calculated using the formula that involves the principal amount, the interest rate, and the time period during which the money is borrowed or invested. The correct formula is:

Simple Interest = Principal × Rate × Time

In this calculation, the principal represents the initial amount of money borrowed or invested. The rate is usually expressed as a decimal (for example, 5% would be 0.05), and the time is generally expressed in years. Multiplying these three components together allows you to determine the amount of interest accrued over the specified time period.

This formula effectively captures the relationship between these variables: as the principal increases, or as the rate or time increases, the simple interest increases proportionally. This linear relationship defines simple interest and differentiates it from compound interest, where interest is calculated on previously accrued interest. Understanding this formula is essential for solving problems related to loans, investments, and financial planning.