Which statement correctly defines simple interest?

Which statement correctly defines simple interest?

• A. Interest earned on principal plus accumulated interest
• B. Interest paid on the principal alone
• C. A fee charged for processing
• D. The total balance after deposits

Answer: (B)

Simple interest is earned or charged only on the original amount put in or borrowed, the principal. That means the interest for each period is a percentage of the principal, not of any interest that has already accumulated. The statement that describes interest paid on the principal alone is the correct definition. For example, with a $1,000 principal at 5% per year, simple interest adds $50 each year, so after two years the total interest is $100 and the balance is $1,100. This differs from compound interest, which builds on the total amount including previously earned interest. The other choices describe interest on the principal plus accumulated interest, a processing fee, or the total balance, none of which define simple interest.

Simple interest is earned or charged only on the original amount put in or borrowed, the principal. That means the interest for each period is a percentage of the principal, not of any interest that has already accumulated. The statement that describes interest paid on the principal alone is the correct definition. For example, with a $1,000 principal at 5% per year, simple interest adds $50 each year, so after two years the total interest is $100 and the balance is $1,100. This differs from compound interest, which builds on the total amount including previously earned interest. The other choices describe interest on the principal plus accumulated interest, a processing fee, or the total balance, none of which define simple interest.