What is Simple Interest?

Simple interest refers to a method of calculating interest for a single fund, regardless of the length of the deposit period. ^[1]

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In simple interest calculations, the following symbols are often used:

P-principal, also known as opening amount or

The formula for calculating simple interest is:

Interest (I) = principal (P) × interest rate (i) × number of interest periods (n)

Example: An enterprise has an interest-bearing promissory note with a face value of 1200 yuan and a coupon rate of 4%. The date of ticket issuance is June 15 and August 14 (60 days in total), and the interest at maturity is:

I = 1200 × 4% × 60/360 = 8 (yuan)

When calculating interest, unless otherwise specified, the interest rate given is the annual interest rate. For less than one year of interest, one year equals 360 days.

According to people's use requirements, the calculation of simple interest is divided into final value and present value.

1.Calculation of single interest final value

The final value of simple interest is the sum of the principal and interest of a certain fund at a certain point in the future based on the simple interest method. The calculation formula of the simple interest final value is:

F = P + P × i × n = P × (1 + i × n)

In the above example, if the note is due, the principal and interest payable by the drawer are the final value of the note:

F = 1200 × (1 + 4% × 60/360) = 1208 (yuan)

2.Calculation of present value of simple interest

In real economic life, sometimes it is necessary to determine its present value, or present value, based on the final value. For example, when an unexpired bill is used to apply to a bank for a discount, the bank deducts the accrued interest from the date of borrowing to the maturity date of the bill at a certain interest rate and pays the balance to the holder. The notes are vested in the bank. The interest rate used for discounting is called the discount rate. The calculated interest is called the discount rate. The balance after deducting the discount rate is called the present value.

The formula for calculating the present value of simple interest is:

P = FI = FP × i × t = F / (1 + i × n)

Assume that in the above example, because the company urgently needs to use the money, it will go to the bank for discount on June 27 with this promissory note, and the bank's prescribed discount rate is 6%. Because the promissory note expires on August 14, the discount period is 48 days. The amount the bank pays the business is:

P = 1208 / (1 + 6% × 48/360) == 1208 / 1.008 = 1198.4127

That is to say, in the process of simple interest storage, once the present value of simple interest appears (withdrawing the deposit in advance), the deposit unit or legal person will likely encounter a loss of principal, because the bank uses The final value is settled based on the base value, and there is a great chance that the discounted value is higher than the total interest.