Which interest type is earned on both the principal amount and any previously earned interest?

The correct answer is compound interest, which is characterized by the way it is calculated on both the original principal and the accumulated interest from previous periods. This means that each time interest is calculated, it is added to the principal, and future interest calculations are based on this new total, resulting in interest on interest.

This method allows investments to grow at a faster rate over time compared to simple interest, which only calculates interest on the original principal throughout the investment period. This aspect of compound interest is what makes it a powerful concept in finance and investing, as it allows for exponential growth of an investment over time.

In contrast, capital gains, whether short-term or long-term, refer specifically to the profit made from selling an asset like stock and are not related to interest calculations. Short-term and long-term capital gains are both concerned with the appreciation of asset value rather than the earnings on interest over time.