Question

Robert invested $4,000 five years ago at 4 percent interest. He takes out all his interest earnings and spends them immediately. As a result, he only receives interest on his initial $4,000 investment. That is why he is earning __________________ only.

Answer 1

simple interest

Step-by-step explanation:

Simple interest is the amount of money that an investment earns during 1 given period, it is calculated by multiplying the principal amount of the investment by the interest rate = $4,000 x 4% = $160

On the other hand, compound interest is interest that gains more interest by itself. This means that the interest gained during a given period, will gain more interest itself for the next period. It is calculated using the following formula = principal amount x (1 + interest rate)ⁿ, where n is the number of periods.