Answer
Simple interest is interest paid on the principal amount of money. If you have an account that has 100 dollars in it and earns 5% each year, the simple interest earned is 5 dollars.
Work Step by Step
Compound interest is interest paid on previously paid interest (and the principal amount in the account). If you have an account with 100 dollars in it and it earns 5% each year, the first year will have 5 dollars of simple interest. In the second year, the account will have a total of 105 dollars in it. The compound interest earned will be 5.25 dollars.
