Renee invested $2,000 six years ago at 4.5 percent interest. She spends all of her interest earnings immediately so she only receives interest on her initial $2,000 investment. Which type of interest is she earning?

Question

Quizplus · Accepted Answer

Simple interest is calculated based on the initial investment only, and does not take into account any interest earned from previous periods. This is in contrast to compound interest, which includes interest earned from previous periods as part of the calculation. Since Renee spends her interest earnings immediately, she is only earning interest on her initial $2,000 investment and not accumulating any interest on interest. Therefore, she is earning simple interest.

Renee Invested $2,000 Six Years Ago at 4