Which statement best describes simple interest?

Which statement best describes simple interest?

• A. Interest earned on the original money you deposited, calculated as Principal × Rate × Time.
• B. Interest earned on the new amount after compounding.
• C. Interest paid on a loan after many years.
• D. Interest only applies to credit cards.

Answer: (A)

Simple interest means the interest is earned only on the original amount you started with, the principal. It doesn’t grow on previously earned interest. The amount of interest is found using Principal × Rate × Time, with the rate as a decimal and time in years (or the same time unit used for the rate). For example, $100 deposited at 5% per year for 2 years earns 100 × 0.05 × 2 = $10 in interest, so you’d have $110 total after 2 years. This differs from compound interest, where each period’s interest is calculated on the new, larger balance. The other statements aren’t correct because interest can apply in many situations (not just loans or credit cards), and compounding, not simple interest, involves earning interest on the balance that already includes prior interest.

Simple interest means the interest is earned only on the original amount you started with, the principal. It doesn’t grow on previously earned interest. The amount of interest is found using Principal × Rate × Time, with the rate as a decimal and time in years (or the same time unit used for the rate). For example, $100 deposited at 5% per year for 2 years earns 100 × 0.05 × 2 = $10 in interest, so you’d have $110 total after 2 years. This differs from compound interest, where each period’s interest is calculated on the new, larger balance. The other statements aren’t correct because interest can apply in many situations (not just loans or credit cards), and compounding, not simple interest, involves earning interest on the balance that already includes prior interest.