Calculation of Compound Interest Calculator

Compound Interest Formula:

\[ A = P \times (1 + \frac{r}{n})^{(n \times t)} \]

Principal Amount (P):

₹

Annual Interest Rate (r):

Time (t):

years

Compounding Frequency (n):

Future Value (A):

Interest Earned:

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1. What is Compound Interest?

Compound interest is the interest calculated on the initial principal and also on the accumulated interest of previous periods of a deposit or loan. It's often called "interest on interest" and makes a sum grow at a faster rate than simple interest.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

\[ A = P \times (1 + \frac{r}{n})^{(n \times t)} \]

Where:

\( A \) — Future value of the investment/loan
\( P \) — Principal investment amount (initial deposit or loan amount)
\( r \) — Annual interest rate (in decimal)
\( n \) — Number of times interest is compounded per year
\( t \) — Time the money is invested or borrowed for, in years

Explanation: The formula calculates how much an investment will grow over time when interest is compounded at regular intervals.

3. Importance of Compound Interest

Details: Compound interest is a fundamental concept in finance that helps investors understand how their money can grow over time. It's crucial for retirement planning, investment strategies, and understanding the true cost of borrowing.

4. Using the Calculator

Tips: Enter the principal amount in ₹, annual interest rate as a percentage, time in years, and select the compounding frequency. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between simple and compound interest?
A: Simple interest is calculated only on the principal amount, while compound interest is calculated on the principal plus accumulated interest.

Q2: How does compounding frequency affect returns?
A: More frequent compounding (daily vs annually) results in higher returns due to interest being calculated on interest more often.

Q3: What is the rule of 72?
A: A simple way to estimate how long an investment will take to double: Divide 72 by the annual interest rate.

Q4: Can compound interest work against me?
A: Yes, when borrowing money, compound interest can significantly increase the total amount you owe over time.

Q5: Is compound interest taxed?
A: In most jurisdictions, interest earned through investments is subject to taxation in the year it's earned.