Page 120 - New Medley 5 Semester 2

4 Simple Interest Competencies

C-4.1, C-4.2, C-4.3 , C-5.1

Principal, Interest and Amount

In our daily life, we do not have always enough money to fulfil the
needs, so we have to borrow some money as a loan from other persons
or institutions. After sometime, when we go to pay the loan credited, we

have also to give some extra money with it to settle the loan.

On the other hand, when we have money exceeded from our monthly
expenses, we keep it in our savings account. After a certain period of

time, banks also added some extra money to our account.

The extra amount of money that we have to pay as a service charge to

somebody or banks add to our account is called interest or simple interest.

The sum of money that we borrowed from somebody or deposited in the

bank account is called principal. The total money that we paid after a
period of time to settle the loan is called amount. Think of the following

situation to clear these terms.

Suppose, a man borrowed a sum of `5000 from an institution and after

1 year, he paid `5600 to settle the loan.

Here, principal = `5000, and amount = `5600

\ Extra money = `5600 – `5000 = `600, which is interest.

Thus, Simple Interest (S.I.) = Amount (A) – Principal (P)

or Amount = Principal + Interest

and Principal = Amount – Interest

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