1. What is Compound Interest?

Compound interest is interest calculated on the initial principal and also on the accumulated interest of previous periods of a deposit or loan. It's a powerful concept that allows savings to grow at an accelerated rate over time.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

Where:

• \( A \) — Maturity amount ($)
• \( P \) — Principal amount ($)
• \( R \) — Annual interest rate (decimal)
• \( n \) — Compounding frequency per year
• \( T \) — Time in years

Explanation: The formula calculates how much your initial investment will grow based on the interest rate, compounding frequency, and time period.

3. Importance of Compound Interest

Details: Compound interest is fundamental to long-term wealth building. It allows investors to earn interest on their interest, leading to exponential growth of savings over time, particularly in instruments like Certificates of Deposit (CDs).

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 the principal and accumulated interest.

Q2: How does compounding frequency affect returns?
A: More frequent compounding (daily vs annually) results in higher returns because interest is calculated and added to the principal more often.

Q3: Are CD rates fixed or variable?
A: Most CDs have fixed interest rates for the term duration, though some special CDs may offer variable rates.

Q4: What happens if I withdraw from a CD early?
A: Early withdrawal from a CD typically results in penalties, which may reduce or eliminate earned interest.

Q5: Are CD investments insured?
A: CDs offered by FDIC-insured banks are insured up to $250,000 per depositor, per institution.