Sara invested $500 six years ago at 5 percent interest.She spends her earnings as soon as she earns any interest so she only receives interest on her initial $500 investment.Which type of interest is Sara earning?

Question

Quizplus · Accepted Answer

Sara is only earning interest on her initial investment of $500 and not on any interest earned previously. This is the definition of simple interest. Compound interest would earn interest on both the principal and any previously earned interest, but that is not the case here. Free interest and complex interest are not commonly used financial terms, and interest on interest is another term for compound interest, which is not applicable in this scenario.

Sara Invested $500 Six Years Ago at 5 Percent Interest