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Compound Interest Formula:
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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 can make a sum grow at a faster rate than simple interest.
The calculator uses the compound interest formula:
Where:
Explanation: The formula calculates how much your investment will grow over time with compound interest, taking into account how frequently the interest is compounded.
Details: Compound interest is a powerful financial concept that allows investments to grow exponentially over time. It's essential for retirement planning, long-term savings, and understanding the true cost of borrowing.
Tips: Enter the principal amount in dollars, annual interest rate as a decimal (e.g., 0.05 for 5%), compounding frequency (how many times per year interest is compounded), and time in years. All values must be positive numbers.
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 result?
A: More frequent compounding (daily vs. annually) results in higher returns because interest is calculated and added to the principal more often.
Q3: What is a typical compounding frequency?
A: Common frequencies include annually (1), semi-annually (2), quarterly (4), monthly (12), and daily (365).
Q4: Can this calculator be used for loans?
A: Yes, the same formula applies to compound interest on loans, though the result represents the total amount owed rather than earned.
Q5: How accurate is this calculation?
A: This provides a mathematical estimate. Actual results may vary slightly due to rounding practices and specific financial institution policies.