Financial Mathematics • Topic 1 of 6

Interest

Simple interest is interest paid only on the original principal, not on interest already earned. The formula is I = P × r × t, where P is the principal, r the annual rate written as a decimal, and t the time in years. So $1,000 at 5% for 3 years earns 1000 × 0.05 × 3 = $150. The total amount owed or held is then principal plus interest, P + I. The most common mistakes are forgetting to convert the percent to a decimal and confusing the interest with the total. The SAT uses simple interest in savings, loan and investment contexts.

Column chart of simple interest over 3 years: a constant principal block plus one more equal interest block added each yearSimple interestYear 1Year 2Year 3PrincipalInterest added each yearSimple interest: I = P × r × t (same amount each year)

✅ Solved examples

1. $1,000 at 5% simple interest for 3 years. Interest earned?
I = 1000 × 0.05 × 3 = $150.
2. $2,000 at 4% for 2 years. Interest?
2000 × 0.04 × 2 = $160.
3. $500 at 6% for 4 years. Total amount?
Interest 500 × 0.06 × 4 = 120; total 500 + 120 = $620.
4. $1,500 at 10% for 1 year. Interest?
1500 × 0.10 × 1 = $150.

✏️ Practice — try these, take hints as needed

1. $800 at 5% simple interest for 2 years. Interest?
I = P·r·t.
800 × 0.05 × 2.
—
$80.
2. $1,200 at 3% for 4 years. Interest?
1200 × 0.03 × 4.
—
—
$144.
3. $2,500 at 8% for 1 year. Interest?
2500 × 0.08 × 1.
—
—
$200.
4. $1,000 at 6% for 5 years. Total amount?
Interest = 1000 × 0.06 × 5 = 300.
Add to principal.
—
$1,300.
5. $600 at 10% for 3 years. Interest?
600 × 0.10 × 3.
—
—
$180.

📝 Topic test — 8 questions

Auto-graded with full solutions; saved to your dashboard. Use the calculator and formula sheet (top-right) any time.

Loading questions…
Compound Interest →