simple interest financial definition of simple interest. simple interest finance term by the Free Online Dictionary.

Simple interest

Interest calculated as a simple percentage of the original principal amount. Compare to compound interest.

Simple Interest

Interest that does not compound. That is, simple interest is a percentage of the principal amount and is not added to the principal itself. For example, if one buys a $1000 bond that pays a 2% coupon in simple interest, one receives $20 each coupon date. The $20 is never added to the $1000. See also: Compound interest.

simple interest

The interest that is paid on an initial investment only. Simple interest is calculated multiplying the investment principal times the annual rate of interest times the number of years involved. Compare compound interest.

Simple interest. If you earn simple interest on money you deposit in a bank or use to purchase a certificate of deposit (CD), the interest is figured on the amount of your principal alone.

For example, if you had $1,000 in an account that paid 5% simple interest for five years, you'd earn $50 a year ($1,000 x .05 = $50) and have $1,250 at the end of five years.

In contrast, if you had been earning compound interest, you'd have $1,276.29 at the end of five years, since the interest you earned each year, as well as your principal, would have earned interest.

simple interest

Interest on the principal balance of a loan or debt,but without compounding due to also charging interest on past-due and unpaid interest.

Simple Interest

A transaction in which interest is not paid on interest— there is no compounding.

For example, if you deposit $1,000 in an account that pays 5% a year simple interest, you would receive $50 interest in year one and another $50 in year two. If interest were compounded annually, you would receive $52.50 in year two.

All deposit accounts compound interest, however, because if they didn't, depositors would shuffle accounts between banks. In my example, you could withdraw the $1050 at the end of year one, put it into another bank, and earn $52.50 in year two.

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