Loan Officer Practice Exam

Which type of interest is calculated by multiplying the daily interest rate by the principal and the number of days that elapse between payments?

1. Simple interest.

2. Accrued interest.

3. Static interest.

4. Compound interest.

The correct answer is: Simple interest.

Simple interest is defined as the interest calculated on the principal amount of a loan or deposit. It is computed by taking the daily interest rate, multiplying it by the principal (the original sum of money), and then multiplying that result by the number of days the money is borrowed or invested. This straightforward method reflects how much interest accumulates solely based on the original amount without taking into account any interest that may have previously been added to the principal over time. In contrast, accrued interest refers to the interest that has accumulated but has not yet been paid. Static interest is not commonly used in financial terminology and does not accurately describe any standard method for calculating interest. Lastly, compound interest involves calculating interest on both the initial principal and the accumulated interest from previous periods, leading to a different computation method than the one described in the question. Thus, simple interest is the appropriate choice for this calculation method.