Final answer:
The interest described where interest is earned on both the principal and the accumulated interest is known as compound interest. This differs from simple interest, which is only calculated on the principal amount.
Step-by-step explanation:
The type of interest in which, in the second period, interest is earned on the principal as well as on the interest from the first period is known as compound interest. Unlike simple interest, which is calculated only on the principal amount, compound interest considers both the initial principal and the accumulated interest from previous periods. To find compound interest, you subtract the present value from the future value, which is found using the formula:
Future Value = Principal x (1 + interest rate)time
For example, if you have a three-year investment, you would apply the formula as follows to find the future value and then determine the compound interest by comparing it to the original principal amount.