Final answer:
Simple interest is calculated only on the principal amount, while compound interest is calculated on both the principal and the accumulated interest. Compound interest earns interest on interest, making it more effective over time.
Step-by-step explanation:
Simple interest is an interest rate calculation only on the principal amount. It is calculated using the formula:
Simple Interest = Principal * Rate * Time
Compound interest, on the other hand, is calculated not only on the principal amount but also on the accumulated interest from previous periods. It is calculated using the formula:
Compound Interest = Principal * (1 + Rate)^Time - Principal
The key difference between simple and compound interest is that compound interest earns interest on interest, resulting in higher total interest earned over time.