Simple interest
If you put money into a bank or building society they will pay you interest on this money.
If you have borrowed money from a bank or building society for a mortgage or other loan, you have to pay them interest.
Simple interest is calculated on a yearly basis (annually) and depends on the interest rate. The rate is often given per annum. This means per year.
Example
Sally deposits \(£600\) into an account with an interest rate of \(5\%\) per annum.
Calculate the interest that Sally receives in one year and find how much money she has in the account after one year.
Interest \(= 5\%\) of \(£600\)
\(= \frac{5}{{100}} \times 600\)
\(= \pounds30\)
New balance:
\(= \pounds600 + \pounds30\)
\(= \pounds630\)
After one year Sally will have \(\pounds630\).
Now try this question:
Question
Jamie's bank account pays interest at a rate of \(4.3\%\) per year.
If he puts \(\pounds850\) into his account, how much will Jamie have after a year?
Interest \(= 4.3\%\) of \(\pounds850\)
\(= \frac{{4.3}}{{100}} \times 850\)
\(= \pounds36.55\)
New balance:
\(= \pounds850 + \pounds36.55\)
\(= \pounds886.55\)
The new balance after a year will be \(\pounds886.55\)
