Which type of interest is calculated on the initial principal and the accumulated interest from previous periods?

• A. Compound Interest
• B. Interest Rate
• C. Savings Growth
• D. Credit Card

Answer: (A)

This question is about how interest is calculated over time when you earn interest not only on the original amount but also on interest that has already accumulated. That approach is called compound interest, where each period’s interest is computed on the new balance, which includes prior interest. For example, with a principal of $1,000 at 6% compound interest, you’d have $1,060 after one year, and $1,123.60 after the second year because the 6% in year two applies to the $1,060.

The other options don’t describe this calculation method. An interest rate is the percentage used, but it doesn’t specify whether interest is computed on the initial amount only or on accumulated interest. Savings growth is a general idea of increasing savings, not a specific calculation method. A credit card is a product type that may charge interest, but it isn’t the method of calculating interest.

So, the best term for calculating interest on the initial principal and the accumulated interest from previous periods is compound interest.