Ohio Assessments for Educators (OAE) Mathematics Practice Exam

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In the context of simple interest, what does the formula I = Prt represent?

Interest earned over time
The total investments made
Final amount of the investment
The principal amount only

The correct answer is: Interest earned over time

The formula I = Prt is used to calculate the simple interest earned on an investment over a specific period of time. In this formula, "I" represents the interest earned, "P" is the principal amount (the initial amount invested), "r" is the rate of interest (usually expressed as a decimal), and "t" is the time period for which the money is invested or borrowed, typically measured in years. The reason this formula specifically represents the interest earned over time is that it directly outlines how much additional money is generated from the principal based on the rate and the duration of the investment. When you multiply the principal amount by the interest rate and then by the time, the result gives you the amount of interest accrued. This concept is fundamental in finance, as it allows individuals to understand how their money grows over time with simple interest. Understanding this formula is essential for making informed financial decisions regarding investments, loans, and savings.