What type of interest is computed only on the principal balance and not on unpaid interest?

The correct answer is simple interest. This type of interest is calculated solely on the principal amount, which is the initial sum of money loaned or invested, and does not take into account any additional interest that may have accrued on that principal over time. This means that the interest does not compound; it remains constant and is based only on the original principal amount throughout the period of the loan or investment.

In contrast, compound interest is calculated on both the principal and on the interest that has already accrued, resulting in interest being added to the principal balance. This leads to a growing total balance that generates further interest. Adjustable interest involves rates that may vary over time, often linked to a specific index or benchmark, while fixed interest refers to a consistent interest rate that does not change over the life of the loan.

Understanding the distinct characteristics of these different types of interest is vital in finance, as it impacts how borrowers and investors calculate their costs and returns. Simple interest provides a straightforward calculation method, particularly for short-term loans or investments.