By definition, a bank that pays simple interest on a savings account will pay interest:

By definition, a bank that pays simple interest on a savings account will pay interest:

1: only if all previous interest payments are reinvested

2: only at the beginning of the investment period

3: on interest

4: on both the principal amount and the reinvested interest

5: only on the principal amount originally invested

Answer: 5: only on the principal amount originally invested

This is a synonymous statement of simple interest that is an approach used to determine the interest accrued only on the principal amount and the time within.

Simple interest is calculated using the formula: Interest = Principal × Rate × Time, where interest is the product of depositing the principal’s amount (the initial amount of money invested or borrowed) by multiplying the interest rate and the time duration (expressed as a fraction of a year or as a year).

In the case of compound interest, interest gets calculated from both the initial principal amount and all the accumulated interests since the beginning of the compounding, yet with simple interest, only the initial principal amount is accruing interest. The interest amount is computed on the primary principal amount alone and no interest in-interest is paid.

The key benefit of this mechanism is that it is straightforward to apply, but you end up with lower overall returns in the event of compound interest, where the interest is reinvested earning more and more interest over time.