Simple interest is interest that is accumulated or earned on a principal sum. If the amount of the principal sum is unchanged from year to year, the interest per year will remain the same.
Interest can be calculated using the formula below:
Simple Interest Formula
I = P x R x T
I = Interest on the dollar amount per year
P = Principal
R = Interest rate stated in a percentage
T = Time calculated in years
Two-Year Bank Note Calculation
Using the simple interest formula above we can calculate the amount of interest a business would pay on a two-year note using a $3,000 principal sum.
For example, consider that a business signed a two-year note payable on a loan valued at $3,000. The terms of the note state that the business will pay back both the interest and principal at the due date with a simple interest rate of 10% per year. Given the terms of the note, the amount of interest on the note would total $600, calculated as $3,000 (P) x 0.10 (I) x 2 (T). Hence, the business would be required to pay $3,600 on the due date.
$3,000 (Principal Sum) + $600 (Interest) = $3,600 (Total Sum Payable).
Elaine Allan, BA, MBA
Technology & Business Blogger
Vancouver, BC, Canada