Ace the CMA 2026 Challenge – Unlock Your Accounting Superpowers!

Simple interest is calculated using the formula that involves the loan amount and the stated interest rate. Specifically, simple interest is found by multiplying the principal amount (the initial loan amount) by the stated interest rate. This calculation yields the interest earned or paid on the principal over a specified time period, but does not incorporate the time factor within the stated rate itself, which distinguishes it from compounded interest calculations.

Let’s consider the context of the other options to clarify why they do not represent the proper calculation for simple interest. The second choice involves multiplying the stated rate by the loan term, which does not reflect the methodology for calculating interest, as it lacks the essential component of the principal amount. The third option suggests adding principal and interest, which reflects the total amount after interest has been applied, but does not directly calculate the interest itself. The fourth option includes additional complexity that suggests a compound interest calculation, which is not applicable in a simple interest context. Thus, the correct response succinctly captures the essence of determining simple interest, emphasizing the product of the loan amount and the interest rate.