1. What is Simple Interest?

Simple interest is a method of calculating interest where the interest is computed only on the principal amount throughout the entire term of the investment or loan. It is commonly used for certificates of deposit (CDs) and other fixed-income investments.

2. How Does the Calculator Work?

The calculator uses the simple interest formula:

Where:

• \( I \) — Interest earned (currency)
• \( P \) — Principal amount (currency)
• \( r \) — Annual interest rate (decimal)
• \( t \) — Time in years

Explanation: The formula calculates the interest earned by multiplying the principal amount by the annual interest rate and the time period in years.

3. Importance of CD Rate Calculation

Details: Calculating CD earnings helps investors understand their potential returns, compare different investment options, and make informed financial decisions about fixed-income investments.

4. Using the Calculator

Tips: Enter the principal amount in dollars, annual interest rate as a decimal (e.g., 0.05 for 5%), and time in years. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What is the difference between simple interest and compound interest?
A: Simple interest is calculated only on the principal amount, while compound interest is calculated on both the principal and accumulated interest.

Q2: Are CD rates typically simple or compound interest?
A: Most CDs use compound interest, but this calculator provides simple interest calculation for educational and comparison purposes.

Q3: How do I convert percentage to decimal for the interest rate?
A: Divide the percentage by 100 (e.g., 5% becomes 0.05, 3.25% becomes 0.0325).

Q4: Can I use this for partial years?
A: Yes, you can enter fractional years (e.g., 0.5 for 6 months, 0.25 for 3 months).

Q5: Is simple interest commonly used in real financial products?
A: Simple interest is less common than compound interest in modern financial products but is still used in some short-term loans and educational examples.