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Compound Interest Formula:
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The compound interest formula calculates the future value of an investment or loan where interest is added to the principal, and future interest is calculated on both the initial principal and the accumulated interest from previous periods.
The calculator uses the compound interest formula:
Where:
Explanation: The formula accounts for the effect of compounding, where interest is earned on both the initial principal and the accumulated interest from previous periods.
Details: Understanding compound interest is crucial for financial planning, investment decisions, and loan management. It demonstrates how investments grow over time and how debt can accumulate with compounding interest.
Tips: Enter principal in ZAR, annual interest rate as a decimal (e.g., 0.05 for 5%), compounding frequency per year, and time in years. All values must be positive.
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 both the principal and accumulated interest.
Q2: How does compounding frequency affect the final amount?
A: More frequent compounding (e.g., monthly vs. annually) results in higher returns due to interest being calculated more frequently.
Q3: What are typical compounding frequencies?
A: Common frequencies include annually (1), semi-annually (2), quarterly (4), monthly (12), and daily (365).
Q4: How do I convert percentage rate to decimal?
A: Divide the percentage by 100 (e.g., 5% becomes 0.05).
Q5: Can this calculator be used for loans?
A: Yes, the same formula applies to both investments and loans, though for loans it shows the total amount to be repaid.