What is the nature of interest? Distinguish between "simple interest" and "compound interest."
Interest is the payment for the use of money. It may represent a cost or earnings depending upon whether the money is being borrowed or loaned. The earning or incurring of interest is a function of the time, as well as the amount of money, and the risk involved (risk may be reflected in the interest rate).
Simple interest is computed on the amount of the principal only, while compound interest is computed on the amount of the principal plus any accumulated interest. Compound interest involves interest on interest while simple interest does not.
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