Simple Interest The simple interest formula is I = Prt (Interest = Principal * r

Question

Simple Interest

The simple interest formula is I = Prt (Interest = Principal * rate * time). This is one way that interest is calculated on a loan or investment.

Create a loan scenario: Tell a story about the purpose of the loan, who was involved, and explain the terms and conditions of the loan. Present your scenario to the class; make sure it includes values for three of the four variables for the simple interest formula. Do not solve the problem, but let your classmates complete the solution.

Explanation / Answer

Johnson needs a study loan to complete his four-year engineering course. Johnson’s father cannot afford to pay the tuition fee that amounts to, say $30,000 for the course of study. The bank insists on 20% margin and 2% processing fee.

The loan amount to be sanctioned will be $24,000 repayable within 6 years of time, in which one year of moratorium (grace time) is included after the completion of course. The interest rate is 11.5% simple interest calculated every year. There is an option to service the loan during the study period and if done, there will be a 0.25% reduction in the interest rate on the principal, but and not mandatory.

The student is supposed to start repaying the loan within one year after completion of the engineering course or within 6 months after completion of the course in case he gets employed. In case the student fails to honor repayment after one year, there will be a penalty interest of 0.25% on the entire principal which would include interest accrued as well. The repayment can start monthly, quarterly, or yearly depending on the convenience of the loanee.

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