Interest and Interest Rate Calculation
Calculate interest by multiplying the principal, your starting amount, by the interest rate: interest = principal × rate. So 5% of £200 is £10, growing the £200 to £210.
Video Lesson
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Flashcards
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Understanding Interest
- Interest is the extra money earned or paid on an original amount.
- The original amount is called the principal.
The Interest Formula
- You use interest = principal × interest rate for one year.
- If the time is shorter, you take the fraction of a year.
Calculating the Interest Rate
- You scale the interest to one year first.
- You then rearrange to find interest rate = interest ÷ principal.
Calculating the Principal
- You rearrange the formula to make the principal the subject.
- You divide the interest by the interest rate to find it.
Practice Questions
Test your understanding
You deposit £100 in a bank offering a annual interest rate. How much interest will you earn after 1 year?
Correct! 🎉 +10 pointsNot quite right
The principal is £100, and the annual interest rate is . Multiply the principal by the interest rate: £ £6. So, you will earn £6 in interest after 1 year.
A savings account offers a annual interest rate. If you deposit £60, how much interest will you earn in 1 year?
Correct! 🎉 +10 pointsNot quite right
The principal is £60, and the annual interest rate is . Multiply the principal by the interest rate: £ £3.
Maria deposits £400 in a bank with a annual interest rate. How much interest will she earn after 3 months?
Correct! 🎉 +20 pointsNot quite right
The yearly interest is £ £8. Since 3 months is one-quarter of a year, the interest earned is £ £2.
A bank offers a annual interest rate. If you deposit £250 for 1 year, how much total amount will you have?
Correct! 🎉 +20 pointsNot quite right
The interest for one year is £ £10. Add this to the principal: £250 + £ £260.
Tom deposits £1000 in a bank. After 1 year, he receives £1030. What was the interest rate?
Correct! 🎉 +20 pointsNot quite right
The interest earned is £1030 − £ £30. Using Interest = Principal × Rate, we get Rate. So, , which is .
You earn £18 in interest after 6 months on an investment with a annual interest rate. What was the initial amount you invested?
Correct! 🎉 +30 pointsNot quite right
Since 6 months is half a year, double the interest to find the yearly interest: £ £36. Using Interest = Principal × Rate, we have Principal × . So, £1200.
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Interactive Activity
Adjust the principal, rate, and time to see how interest is calculated step by step
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Students Also Ask
The questions students bump into most on this topic
Multiply the principal by the interest rate to find the interest for one year. If the money is saved for less than a year, find what fraction of the bank's 360-day year it covers, then take that fraction. Add the interest to the principal for the total amount.
The principal is the original amount of money you put into a bank, before any interest is added. In the very first example, the £100 you deposit is the principal, and the interest is then calculated as a percentage of this amount.
The interest rate is a percentage, such as 5%, that tells you how much a bank pays. The interest is the actual amount of money this produces, such as £5 on £100. So the rate is the percentage, and the interest is the pounds you earn.
Banks usually treat one year as 360 days when working out interest. This is why the time is written as a fraction of 360. For example, 60 days counts as one sixth of the year, so you earn one sixth of the full year's interest.
First find the interest by subtracting the principal from the total amount. If the time was less than a year, scale the interest up to a full year. Then divide the year's interest by the principal. For Maria, £8 divided by £200 gives a 4% rate.