Simple Interest is defined as...

• A. Interest paid or figured on the original amount.
• B. Interest computed on both principal and accumulated interest.
• C. Interest from investments only.
• D. Interest calculated for a savings account.

Answer: (A)

Simple interest is calculated only on the original amount, the principal. The interest earned or charged does not include any interest that has already accumulated. The standard formula is I = P × r × t, with P as the principal, r as the rate per time period, and t as the time in years (or the appropriate time unit). For example, $1,000 at 5% for 3 years yields I = 1,000 × 0.05 × 3 = 150, so you’d have $150 in interest and a total of $1,150. Because it doesn’t earn interest on interest, the growth is linear over time. This matches the description that interest is computed on the original amount. The other ideas describe compound interest (interest on both principal and accumulated interest) or are unrelated to the method of calculation.