1. What is the Simple Interest Formula?

The simple interest formula calculates the interest earned or paid on a principal amount over a specific time period at a fixed annual interest rate. It's commonly used for certificates of deposit (CDs) and other fixed-income investments.

2. How Does the Calculator Work?

The calculator uses the simple interest formula:

Where:

• \( I \) — Interest amount (currency)
• \( P \) — Principal amount (currency)
• \( r \) — Annual interest rate (decimal)
• \( t \) — Time period (years)

Explanation: The formula calculates interest based only on the original principal amount, without compounding over time.

3. Importance of Simple Interest Calculation

Details: Simple interest calculation is essential for understanding investment returns on CDs, short-term loans, and other financial products that don't involve compounding.

4. Using the Calculator

Tips: Enter principal amount in currency, annual interest rate as a decimal (e.g., 0.05 for 5%), and time period in years. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between simple and compound interest?
A: Simple interest is calculated only on the principal amount, while compound interest is calculated on both the principal and accumulated interest.

Q2: How do I convert percentage rate to decimal?
A: Divide the percentage by 100. For example, 5% becomes 0.05 as a decimal.

Q3: Can this calculator be used for months instead of years?
A: Yes, but you must convert months to years. For example, 6 months = 0.5 years.

Q4: Is simple interest commonly used for CDs?
A: While some CDs use simple interest, many modern CDs use compound interest. Always check the terms of your specific CD.

Q5: What's the advantage of simple interest?
A: Simple interest is easier to calculate and understand, making it suitable for short-term investments and loans.