Assessment and Learning in Knowledge Spaces (ALEKS) Basic Math Placement Practice Test

What is the formula for calculating simple interest?

1. I = P + rt

2. I = Prt

3. I = r + t

4. I = P - r

The correct answer is: I = Prt

The formula for calculating simple interest is given by the equation \( I = Prt \), where \( I \) represents the interest earned, \( P \) stands for the principal amount (the initial sum of money), \( r \) is the rate of interest per time period (expressed as a decimal), and \( t \) is the time the money is invested or borrowed for, typically measured in years. This formula directly reflects how simple interest accumulates. The interest earned is proportional to both the amount of money (the principal) and the duration of the investment or loan, scaled by the interest rate. This means that if you increase any of these factors—either the principal, the interest rate, or the time period—the total interest will increase accordingly. Understanding this formula is crucial in finance, as it helps individuals calculate how much they will earn from savings or pay on loans without the complexities of compounding interest.