What is the simple interest formula used to calculate annual interest?

The formula for calculating simple interest is based on the fundamental relationship between the principal amount of money, the interest rate, and the time period that the money is invested or borrowed. This relationship can be represented by multiplying the principal by the annual interest rate and then multiplying that result by the time in years.

When you use the formula, you start with the principal, which is the initial amount of money, then multiply it by the interest rate expressed in decimal form (for example, 5% becomes 0.05), and finally multiply that product by the time the money is held in years. This straightforward multiplication provides the amount of interest earned or paid over that period.

The other options presented do not adhere to the principles of interest calculation:

• Adding the principal, rate, and time does not yield any meaningful financial calculation related to interest.

• Dividing the principal by the rate and then multiplying by time alters the relationship and does not coincide with how interest is accrued.

• Subtracting the rate from the principal and then multiplying by time does not reflect the process of calculating interest and leads to an incorrect result as well.

Thus, the correct formula A, Principal × Rate × Time, accurately reflects the method for calculating simple interest.