Final answer:
The statement regarding compound interest is true. Compound interest is the calculation of interest on both the initial principal and the accumulated interest from previous periods. It differs from simple interest, which is only calculated on the principal amount.
Step-by-step explanation:
The student's question is: "Compound interest takes the interest accumulated in one interest period and adds it to the principle amount used to calculate interest in the next period. a. True b. False" The correct answer is a. True. Compound interest indeed involves an interest rate calculation on the principal plus the accumulated interest from prior periods.
Compound interest is calculated by finding the difference between the future value and the present value of the principal. The future value is computed as Principal x (1 + interest rate)^time, where time represents the number of interest periods that have passed. Compound interest itself is then the future value minus the present value of the principal.
Consider an example where the principal is $100, the annual interest rate is 5%, and the time is 3 years. To calculate the total future amount with compound interest, you would apply the formula as described, which would yield a different result compared to using simple interest, where the interest is only calculated on the principal amount.