What is the simple interest $734 at 12% for 3 months?

Understanding Simple Interest: A Case Study

In financial transactions, simple interest is a crucial concept that represents the interest charged on a loan or investment. To understand how it works, let’s explore a specific example.

Case Study: Simple Interest Accrual

Consider a loan of $734 taken out for a three-month period at an annual interest rate of 12%. After the three months, the borrower accrued $22.02 in interest.

Calculating Simple Interest

The formula for simple interest is:

Simple Interest = Principal × Rate × Time

where:

• Principal is the amount borrowed or invested
• Rate is the annual interest rate (expressed as a decimal)
• Time is the duration of the loan or investment (in years)

Applying the Formula

In our case study:

• Principal = $734
• Rate = 12% = 0.12
• Time = 3 months = 0.25 years (since 3 months = 1 year × 3/12)

Plugging these values into the formula, we get:

Simple Interest = $734 × 0.12 × 0.25 = $22.02

Therefore, the interest accrued on the loan over the three-month period is indeed $22.02, as stated in the case study.

Significance of Simple Interest

This example illustrates the practicality of simple interest calculations. It helps individuals understand how interest accrues on loans and investments, allowing them to make informed financial decisions. By understanding the formula and applying it to real-life scenarios, one can accurately calculate interest charges and plan accordingly.