Simple Interest

Simple interest: Simple Interest is the product of the principal, the interest rate (per period), and the number of time periods.

To find the simple interest: c=prt, where c (simple interest) is found as the product of p (principle), r (rate), and t (time). For example: Jim borrows $23000 to buy a new car, and the rate is 5.5% over five years. What is the resulting simple interest?

$23000 * 5.5% * 5 = $6325

The simple interest on Jim's auto loan is $6325. If Jim repays his debt in full, he will repay the principal plus the interest, or $29325.

To calculate the simple interest rate r, add together all interest paid, or payable, in a period. Divide the result by the principal at the beginning of the period. The result is the simple interest rate. For example, given a $100 principal:

Credit card debt where $1/day is charged: 1/100 = 1%/day.
Corporate bond where the first $3 are due after six months, and the second $3 are due at the year's end: (3+3)/100 = 6%/year.
Certificate of deposit (GIC) where $6 is paid at the year's end: 6/100 = 6%/year.
There are three problems with simple interest.

The time periods used for measurement can be different, making comparisons wrong. One cannot claim that 1%/day of credit card interest is 'equal' to a 365%/year GIC.
The time value of money means that $3 paid every six months costs more than $6 paid only at year end. So the 6% bond cannot be 'equated' to the 6% GIC.
When interest is due, but not paid, the consequences are unclear. For example, does it remain 'interest payable', like the bond's $3 payment after six months? Alternatively, will it be added to the original principal, as would typically be the case in the 1%/day borrowed via the credit card? In the latter case, it is no longer simple interest, but compound interest.