Final answer:
A bank that pays simple interest on a savings account calculates interest solely on the principal amount, without compounding. Savings accounts usually offer interest rates that are lower than CDs due to the liquidity they offer compared to the fixed terms of CDs.
Step-by-step explanation:
By definition, a bank that pays simple interest on a savings account will pay interest based on the principal amount alone. This means the interest payment does not compound over time, but is instead calculated only on the original amount of money deposited or borrowed. In contrast, with compound interest, the interest is calculated on both the initial principal and the accumulated interest from previous periods.
Banks offer different types of accounts to suit various needs. A checking account is geared towards frequent transactions and typically offers little to no interest. On the other hand, a savings account generally offers some interest rate, incentivizing customers to save. The interest rates on savings accounts are usually lower than those on Certificates of Deposit (CDs) because CDs require the investor to leave their deposit untouched for a fixed period, thus providing a higher interest in return for reduced liquidity.