Simple interest
Interest on the original principal only. Linear growth.
Definition. Simple interest is calculated on the ORIGINAL principal, regardless of accumulated interest. Same amount each year.
Formula:
where:
- = principal (initial amount).
- = annual interest rate as a NUMBER (5 for 5%).
- = time in years.
- = interest earned.
Total amount in account: .
Examples:
£ at for years:
- .
- Total: £.
£ at for years:
- .
- Total: £.
When is simple interest used?
- Some short-term loans.
- Some bonds.
- Less common in modern banking — most savings accounts and mortgages are compound.
Worked qualitative. A bond pays simple interest per year on £. After how many years has the interest equalled the principal?
- Set .
- .
- , so years.
- About years months.
Edexcel tip. Always check if 'simple' or 'compound' is specified. Simple is typically Foundation Tier; Higher Tier focuses on compound.
- .
- is the percentage NUMBER (5, not 0.05).
- Same interest each year.
- Used for some bonds and short-term loans.