How is compound interest best described?

Compound interest is best described as interest calculated on the principal plus accumulated interest. This means that interest is earned not only on the original amount of money deposited or invested (the principal) but also on any interest that has previously been added to that principal. As a result, with compound interest, the total amount grows at an increasing rate over time since interest gets calculated on an ever-increasing balance. This leads to the potential for exponential growth of the investment or savings over the long term, distinguishing it from other types of interest calculations.

The other descriptions do not accurately capture the essence of compound interest. Interest calculated only on the initial principal refers to simple interest, which does not benefit from the effect of compounding. Also, the idea that interest is never paid out does not reflect how compound interest works; rather, it suggests a misunderstanding of the payout mechanisms related to interest-bearing accounts. Finally, simple interest applied over multiple periods does not account for the accumulated interest that compound interest incorporates, leading to different outcomes in calculating total returns.