Simple Interest - Free Accounting Definitions & Terms

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Simple Interest

Simple interest is interest earned only on the original principal amount invested. Consider you invest $100 in a savings account that pays 10% interest per year, how much will you have at the end of the 1st year? This is quite simple, you will have $100 x 10% = $110. This $110 is equal to your original principal plus $10 in interest that you earned from your bank. Therefore, $110 is the future value (FV) of $100 invested for one year at 10% interest, and this simply means $100 today is worth $110 in 1 year, given a 10% interest rate.