What type of interest is earned on both the principal and the accrued interest?

The correct choice is compound interest because it refers to the interest that is calculated on the initial principal as well as on the accumulated interest from previous periods. This means that with compound interest, not only does the investor earn interest on the original amount invested, but they also earn interest on the interest that has already been added to that amount. This results in a growing amount of interest earned over time due to the effect of compounding.

In contrast, simple interest is only applied to the principal amount throughout the investment period and does not factor in any previously earned interest. Straight interest typically involves a fixed percentage applied in a straightforward manner, not rolling interest into the principal. Discount interest usually refers to a type of interest taken upfront from the principal amount before it is disbursed, meaning it does not involve interest compounding. Therefore, the essence of compound interest lies in its ability to generate earnings on both the principal and any interest that accumulates, leading to potentially higher returns over time.