On a certain day, Tim invested $1,000 at 10 percent annual interest

There are two types of interest rates that GMAT handles with.
1) Simple interest
2) Compound Interest

simple interest is basically when you simply multiply your investment amount * interest rate * number of years.

Compound interest formula is \(Interest Earned = A * (1+i)^n - A\), where A is your investment amount.

The difference between the two can be conveyed with the following example:
Suppose you invest 5000 dollars in a bank with an interest rate of 10% for 3 years.

Compounded Annually:
After 1 year, your bank total would be: [$5000 * 0.10] + $5,000 = $5,500. (Total interest earned = $5,500 - $5000 = $500)
After 2 years, your bank total would be:[$5,500 * 0.10] + $5,000 = $6,050. (Total interest earned = $6,050 - $5000 = $1050)
After 3 years, your bank total would be: [$6,050 * 0.10] + $5,000 = $6655. (Total interest earned = $6,655 - $5000 = $1,655)

*Using the compounded interest formula above will give you the same answer.*

Whereas, simple interest for the same investment would be:
After 1 year, your bank total would be: $5,000 * 0.10 * (1) + $5,000 = $5,500. (Total interest earned = $5,500 - $5000 = $500)
After 2 years, your bank total would be: [$5,000 * 0.10 * 2] +$5,000 = $6,000. (Total interest earned = $6,000 - $5000 = $1000)
After 3 years, your bank total would be: [$5,000 * 0.10 * 3] + $5,000 = $6,500 (Total interest earned = $6,500 - $5000 = $1,500)

As you can see, "Compounded annually" charges interest on the bank balance which includes both the initial investment amount + the cumulative interest earned from that investment whereas simple interest is based solely on the interest earned from just the initial investment amount.