Simple interest

Simple interest is interest calculated only on the original principal, using I = P × r × t, so the amount owed grows in a straight line rather than compounding.

ByHoang TruongUpdated July 11, 2026

See it move

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€4,000 deposited at a simple annual rate of 6% earns €240 in year one, €240 again in year two, and €240 again in year three, since interest is calculated only on the original principal. After three years the balance is €4,000 plus €720 total interest, or €4,720, growing in a straight line.

Where it fits

TopicTime Value of MoneyCoreSubjectCorporate FinanceCore

The formula

LaTeX

I = P \times r \times t

Variables

$I$: Simple interest (€)
$P$: Original principal (€)
$r$: Interest rate per period (decimal)
$t$: Number of periods (periods)

Interest earned or owed when it accrues only on the original principal, not on previously accrued interest.

LaTeX

A = P (1 + r t)

Variables

$A$: Total amount at end of term (€)
$P$: Original principal (€)
$r$: Interest rate per period (decimal)
$t$: Number of periods (periods)

Total amount owed or accumulated at the end of the term under simple interest, combining principal and interest in one step.

Check yourself

PracticeCORE

A student borrows €10,000 at a simple annual interest rate of 4% for 5 years. What total amount must be repaid at the end of the 5 years?

Select an answer to check your understanding.