Compound interest earned on a savings account _____.

• A. is calculated on both the initial principal and the accumulated interest from previous periods
• B. is calculated only on the initial principal
• C. remains constant regardless of the interest rate
• D. decreases over time as the account balance grows

Answer: (A)

Verified step by step guidance

1. Understand the concept of compound interest: Compound interest is the interest calculated on the initial principal and also on the accumulated interest from previous periods. This is different from simple interest, which is calculated only on the initial principal.
2. Analyze the options provided in the problem: The first option states that compound interest is calculated on both the initial principal and the accumulated interest from previous periods. The second option states it is calculated only on the initial principal, which is incorrect for compound interest. The third option states it remains constant regardless of the interest rate, which is not true as compound interest depends on the rate. The fourth option states it decreases over time as the account balance grows, which is also incorrect.
3. Relate the concept to the correct answer: Compound interest grows over time because the interest is calculated on an increasing balance (principal + accumulated interest). This aligns with the first option provided in the problem.
4. Eliminate incorrect options: The second, third, and fourth options do not align with the definition or behavior of compound interest. Therefore, they can be eliminated.
5. Select the correct answer: Based on the analysis, the correct answer is that compound interest is calculated on both the initial principal and the accumulated interest from previous periods.