Simple interest

When money is lent or invested, interest is the reward that accrues over time. In the simplest regime, interest is always computed on the starting capital.

Definition — Simple interest

A capital $C_0$ invested at the annual rate $i$ (in decimal form, e.g. $i=0{,}05$ for $5\%$) generates simple interest over $t$ years: $I = C_0\cdot i\cdot t, \qquad \text{amount: } M = C_0(1+it).$ Interest is always computed on the initial capital: it grows linearly over time.

Since the base stays fixed, the interest accruing each year is constant and the amount $M = C_0(1+it)$ is a linear function of time. This is the crucial difference from the compound regime.

Links

Topics: Percentages
Concepts: Interest · Simple interest
Methods: Simple interest
Skills: Using formulae