Which term describes interest earned only on the original amount, not on accumulated interest?

• A. Bond
• B. Simple Interest
• C. ETF
• D. Mutual Fund

Answer: (B)

This question tests how interest is calculated—whether it’s earned only on the original amount or on accumulated interest. The term for interest earned only on the initial principal is simple interest. With simple interest, the interest each period is based solely on the original amount, so I = P × r × t and the total grows by a constant amount each period. For example, $100 at 5% simple interest for 3 years yields $15 in interest (not more), ending at $115. Many investments, however, use compounding, where interest is earned on both the principal and previously earned interest, causing growth to accelerate over time. The other options describe types of investments, not how interest is calculated, so they don’t denote this method of earning interest.