What type of interest is calculated on both principal and accumulated interest?

The correct answer is compound interest because it is defined as interest calculated on the initial principal and also on the interest that has been added to the principal over time. This means that with compound interest, not only does the original amount earn interest, but the interest that is generated in each compounding period also earns interest in subsequent periods. This leads to exponential growth of the investment or loan balance over time.

In contrast, simple interest is calculated only on the principal amount, meaning that the interest does not increase as the balance grows. Fixed and variable interest refer to the consistency of the interest rate over time, rather than how it’s calculated in relation to the principal and accumulated interest. Fixed interest remains constant, while variable interest can fluctuate, but neither concept involves compounding the interest as compound interest does. This distinctive feature of compound interest is what makes it a powerful tool for wealth accumulation over time.