What is the key assumption underlying simple interest?

The key assumption underlying simple interest is that interest accrued is not reinvested. Simple interest is calculated solely on the initial principal amount throughout the investment period. This means that the interest earned does not contribute to future interest calculations; it is a straightforward computation based only on the original sum invested.

In a simple interest scenario, the total interest earned is directly proportional to the principal, the rate of interest, and the duration of time the money is invested or borrowed. This mechanism is distinctly different from compound interest, where interest is calculated on the initial principal plus any interest that has been accumulated in previous periods. The focus on the principal amount and the exclusion of reinvesting interest is fundamental to understanding how simple interest functions.

This makes B the correct choice as it encapsulates the core principle behind simple interest calculations—a fixed, non-dynamic approach to understanding the growth of investments. The other options discuss various aspects that are not inherent to the simple interest model, such as the frequency of interest payments, the assumption of the highest earning alternative, or an increasing principal, which do not accurately reflect the nature of simple interest calculations.