Simple Interest
The interest earned is calculated as follows:
I=P.r.t
Where:
I=Interest
P=initial principal balance
r=interest rate
t=time
If I borrow $2000 from a friend, that amount of money is the principal. P = $2000.
We agree to have him paid back $3600. This includes the principal and the interest, thus:
I = $3600 - $2000 = $1600
That amount of interest is earned in t=4 years.
From the formula above, we can solve for r as follows:
[tex]r=\frac{I}{P\cdot t}[/tex]Substituting:
[tex]r=\frac{1600}{2000\cdot4}=\frac{1600}{8000}=0.2[/tex]This means the interest rate is 20%
