Question: Use the passage below to answer the following question.
When investing money, it is important to know that interest can be
calculated in two ways. Those ways are referred to as simple interest
and compound interest.
Simple Interest
Simple interest is easier to determine than compound interest.
Simple interest is calculated only on the principal, or original
amount, placed into the investment. Simple interest is calculated
annually using the principal balance and excluding any interest that
has accrued during the year.
Simple Interest = $\frac{P \times R \times T}{100}$
$P$ is the Principal amount (the initial amount borrowed or invested)
$R$ is the Rate of Interest (in percentage)
$T$ is the Time (in years)
Compound Interest
Unlike simple interest, compound interest is calculated on the
Calculating interest based on the principal and the accumulated
interest is referred to as what?
compound interest
zero interest
simple interest
1. **State the problem:**
The question asks: "Calculating interest based on the principal and the accumulated interest is referred to as what?"
2. **Recall definitions:**
- Simple interest is calculated only on the principal amount.
- Compound interest is calculated on the principal plus any accumulated interest.
3. **Formula for simple interest:**
$$\text{Simple Interest} = \frac{P \times R \times T}{100}$$
where $P$ is principal, $R$ is rate, and $T$ is time.
4. **Understanding compound interest:**
Compound interest means interest is earned on the principal and on the interest that has been added to the principal over time.
5. **Answer:**
Since the question asks about interest calculated on both principal and accumulated interest, this is the definition of **compound interest**.
**Final answer:** compound interest