Final answer:
Compound interest is calculated on both the principal amount and the interest earned in previous periods, causing the interest applicable to the succeeding period to increase.
Step-by-step explanation:
To understand why interest applicable to the succeeding period increases using compound interest assumption, we need to understand how compound interest works. Compound interest is calculated on both the principal amount and the interest earned in previous periods.
For example, let's say you have $100 and the interest rate is 10%. In the first year, you earn $10 in interest, making your total amount $110. In the second year, the interest is calculated on the new principal of $110, resulting in $11 in interest. So your total amount becomes $121. This process continues for each period, and the interest keeps growing.
Because compound interest is calculated on the increasing principal amount, the interest applicable to the succeeding period increases. This is why compound interest can grow your savings significantly over time.