Investigating the impact of interest rates on savings and borrowing. Simple interest is calculated annually using the interest rate. Simple interest is always calculated using the original amount.
Part ofApplications of MathsFinancial skills
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 which means per year.
Sally deposits \(\pounds600\) 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 \(= 5\% of \pounds600\)
\(= \frac{5}{100} \times 600\)
\(= \pounds30\)
New balance
\(= 600 + 30 \)
\(= \pounds630\)
After one year Sally will have \(\pounds630\).
Now try this 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:
\(= 850 + 36.55\)
\(= \pounds886.55\)
The final balance after a year will be \(\pounds886.55\)
