How is simple interest calculated?

• A. Interest calculated only on the principal and interest.
• B. Interest calculated on the principal amount plus taxes.
• C. Interest calculated only on the principal amount.
• D. Interest calculated on the account balance.

Answer: (C)

Simple interest is calculated only on the principal amount. In this approach, the interest you owe or earn doesn’t add to the amount you base future interest on. The formula is Interest = Principal × Rate × Time, with rate as a decimal per year and time in years. For example, borrowing $1,000 at 5% annual simple interest for 3 years yields $1,000 × 0.05 × 3 = $150 in interest, so you’d owe $1,150 in total after 3 years. This differs from compound interest, where interest is earned on both the principal and any accumulated interest. Taxes or other charges aren’t part of the simple-interest calculation, and “account balance” can increase due to interest but doesn’t change the fact that the interest itself is computed only on the original principal.