Final answer:
In the Compound Interest System, the interest rate applies to both principal and interest. Compound interest is an interest rate calculation on the principal plus the accumulated interest, resulting in higher interest payments over time.
Step-by-step explanation:
In the Compound Interest System, the interest rate applies to both principal and interest.
Compound interest is an interest rate calculation on the principal plus the accumulated interest. It is a form of interest where the interest earned in each cycle is added to the principal, resulting in higher interest payments over time.
For example, if you have $1000 in a savings account with a compound interest rate of 5% per year, after the first year, you would have $1050 (the principal of $1000 plus $50 in interest). In the second year, the interest rate would apply to the new principal of $1050, resulting in $1102.50 (the principal of $1050 plus $52.50 in interest). So, as you can see, the interest rate in each cycle is applied to both the principal and the accumulated interest.