Simple Interest, Profit and Discounts

Imagine you put five thousand dollars into a savings account at a bank. The bank doesn’t just hold onto your money — they use it to lend to other people. As a thank you, the bank pays you a little extra. That extra money is called interest.

Now let’s look at it from the other side. When you borrow money — say you take out a loan — you don’t just pay back what you borrowed. You also have to pay a fee on top. That fee is also called interest. It’s the cost of borrowing someone else’s money.

There are different types of interest, but the simplest is called simple interest. With simple interest, you pay a fixed percentage of the original amount you borrowed — every year, for the length of the loan. It doesn’t matter how much you’ve already paid back. The interest is always calculated on that original amount. That’s what makes it simple.

Let’s look at an example. Sam has just turned eighteen and wants to buy their first car — a used Toyota for twelve thousand dollars. Sam takes out a loan at eight percent simple interest per year, for three years. Let’s work out how much interest that is per year.

Eight percent of twelve thousand. On your calculator, type twelve thousand times zero point zero eight. That gives us nine hundred and sixty dollars. Sam pays nine hundred and sixty dollars in interest every year.

The loan is for three years. So the total interest is nine hundred and sixty times three — that’s two thousand eight hundred and eighty dollars. Adding that to the original twelve thousand, Sam pays back fourteen thousand, eight hundred and eighty dollars in total.

Now let’s look at profit. A shop buys a jacket from a supplier for forty dollars — that’s the cost price. They sell it to a customer for fifty-six dollars — the selling price. What is the percentage of profit made? The profit is the difference — fifty-six minus forty equals sixteen dollars. But what percentage of the original amount is that?

To find the percentage profit, we divide the profit by the cost price. Sixteen divided by forty. Type it in. Sixteen, divide, forty, equals. Zero point four. Shift the decimal two places — forty percent. The shop made a forty percent profit.

Finally, discounts. A shoe store is having a twenty-five percent off sale. A pair of shoes normally costs one hundred and twenty dollars. What’s the sale price? First, let’s find twenty-five percent of one hundred and twenty.

On your calculator, one hundred and twenty times zero point two five equals thirty. The discount is thirty dollars. So the sale price is one hundred and twenty minus thirty — ninety dollars.