Eunchae 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

BlackTom AI · Accepted Answer

The question describes a scenario where Eunchae earns interest only on the initial principal, without earning interest on the interest itself. This is the defining characteristic of simple interest.
Option 1: 'Interest on interest' would imply that the interest earned is itself earning interest in subsequent periods, which is not happening here. Therefore this option is incorrect.
Option 2: 'Compound interest' refers to earning interest on both the initial principal and on accumulated interest from prior periods. Since Eunchae spends all interest as it is earned and does not allow it to accrue, this is not compound interest, so this option is incorrect.
Option 3: 'Complex interest' is not a standard term used to describe a mainstream interest calculation method in finance; it does not accurately describe the described situation, making it incorrect.
Option 4: 'Simple interest' exactly matches the description: interest is calculated only on the original principal and does not compound over time. This aligns with the scenario given.
Option 5: 'Free interest' is not a recognized financial term for a method of calculating interest; it does not apply here and is incorrect.

BUSFIN 3220 AU2025 (2110) Exam 1 - Requires Respondus LockDown Browser

Eunchae 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?

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