What type of interest is calculated only on the principal sum?

• A. Compound interest
• B. Simple interest
• C. Fixed interest
• D. Variable interest

Answer: (B)

Simple interest is calculated solely on the principal sum, meaning it does not take into account any interest that has previously accrued. The formula for calculating simple interest is I = PRT, where I represents the interest, P is the principal amount, R is the interest rate, and T is the time the money is borrowed or invested.

In contrast to simple interest, compound interest involves calculating interest on both the initial principal and the accumulated interest from previous periods. This means that over time, the amount of interest earned or owed can grow more rapidly than with simple interest, making it a different concept entirely.

Fixed interest refers to an interest rate that remains constant throughout the term of a loan or investment, while variable interest can fluctuate based on market conditions or other factors. These two types of interest focus on the rate applied rather than the method of calculating interest on the principal amount. Thus, simple interest is the correct answer as it distinctly operates only on the initial principal without incorporating any other components.