Future Business Leaders of America (FBLA) Business Calculations Practice Test

The equation for calculating simple interest is:

1. Principal × Rate × Time

2. Principal + Interest

3. Principal / Rate / Time

4. Rate × Time

The correct answer is: Principal × Rate × Time

The equation for calculating simple interest is based on the concept that interest is earned on the principal amount over a specific period of time at a certain rate. The correct formula, which is used to compute simple interest, is Principal multiplied by Rate multiplied by Time. In this context, "Principal" refers to the initial amount of money that is being invested or borrowed. "Rate" is the interest rate, typically expressed as a percentage, that indicates how much interest is charged or earned over a specific time frame. "Time" represents the duration for which the money is invested or borrowed, often measured in years. When you multiply these three components together, the formula gives the total interest earned or paid over that period. For example, if you have a principal of $1,000, an interest rate of 5%, and the money is held for 3 years, the calculation would be $1,000 × 0.05 × 3, which results in $150 in interest. This fundamental understanding of how simple interest is derived is critical not just for calculations but also for making informed financial decisions.