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 referred to as "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:

Where:

• \( A \) — Maturity amount (final amount)
• \( P \) — Principal amount (initial investment)
• \( R \) — Annual interest rate (in decimal form)
• \( n \) — Number of times interest is compounded per year
• \( T \) — Time the money is invested 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 demonstrates how investments can grow exponentially over time. It's essential for retirement planning, savings strategies, and understanding long-term investment growth.

4. Using the Calculator

Tips: Enter the principal amount in dollars, annual interest rate as a percentage, select compounding frequency, and time period in years. 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 both the principal and accumulated interest.

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

Q3: What is the Rule of 72?
A: The Rule of 72 is a simple way to estimate how long an investment will take to double: 72 divided by the annual interest rate gives the approximate number of years.

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

Q5: Is this calculator suitable for all types of investments?
A: This calculator works best for fixed-rate investments like savings accounts, CDs, and bonds. It may not accurately represent variable-rate investments or those with fees.