Interest Calculator On Investments

Compound Interest Formula:

\[ A = P \times (1 + \frac{R}{n})^{n \times T} \] \[ I = A - P \]

Principal (P):

Annual Interest Rate (R):

Compounding Frequency (n):

Time (T):

years

Maturity Amount (A):

Interest Earned (I):

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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. It allows investments to grow exponentially over time, making it a powerful concept in finance and investing.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

\[ A = P \times (1 + \frac{R}{n})^{n \times T} \] \[ I = A - P \]

Where:

\( P \) — Principal amount (initial investment)
\( R \) — Annual interest rate (in decimal form)
\( n \) — Compounding frequency per year
\( T \) — Time in years
\( A \) — Maturity amount (final amount)
\( I \) — Interest earned

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

3. Importance of Compound Interest

Details: Compound interest is fundamental to long-term wealth building. It demonstrates how small, regular investments can grow significantly over time due to the "snowball effect" of earning interest on interest.

4. Using the Calculator

Tips: Enter the principal amount in dollars, annual interest rate as a percentage, select compounding frequency, and time 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 principal and 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 and added more often.

Q3: What is the Rule of 72?
A: A quick way to estimate how long it takes for an investment to double: 72 divided by the annual interest rate gives approximate years.

Q4: Are there any limitations to this calculation?
A: This assumes constant interest rates and regular compounding. Real-world investments may have variable rates and additional factors.

Q5: Can this calculator be used for loans?
A: While the formula is similar, loan calculations typically have different parameters and should use specialized loan calculators.