Question

The calculation of interest on the interest of the principal amount is called
a). Simple interest
b). Compound interest
c). Multiple interest
d). Interest quarterly compounded

Answer 1

Hint: We should understand the definitions of simple and compound interest and then use the definition to infer the quantity to which the question refers to.

Complete step-by-step answer:
In case of simple interest, the interest is given only on the principal interest over a definite period of time. The interest is given only on the principal amount and not on the interest which has been gained due to the deposit of the principal amount. Hence, simple interest does not correspond to the statement in the question and cannot be the correct answer.

In compound interest the principal amount, once deposited gets renewed after a fixed time with the addition of the interest amount. Thereafter, the new amount is the principal amount plus the amount gained due to the interest. Therefore, in the next time period, interest is paid considering the new amount and thus on the interest gained in the first time period. This type of interest is similar to the statement given in the question and thus option (b) is the correct answer.

Again, multiple interest does not correspond to the interest on the interest amount. Also, Interest quarterly compounded is a specific type of compound interest and thus does not refer to the general statement given in the question.
Thus, option (b) is the correct answer.

Note: We should note that in simple interest also, interest is paid. However, that interest is given only on the principal amount and not on the interest.