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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 allows savings to grow at an accelerating rate over time.
The calculator uses the compound interest formula:
Where:
Explanation: The formula calculates how much an investment will grow over time when interest is compounded at regular intervals.
Details: Compound interest is a powerful financial concept that allows investments to grow exponentially over time. Understanding compound interest helps in making informed decisions about savings, investments, and retirement planning.
Tips: Enter the principal amount in dollars, annual interest rate as a percentage, number of compounding periods per year, 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 returns?
A: More frequent compounding (daily vs. annually) results in higher returns due to interest being calculated on interest more often.
Q3: What is a typical compounding frequency for savings accounts?
A: Most savings accounts compound interest daily or monthly, though this can vary by financial institution.
Q4: Can this calculator be used for loans as well?
A: Yes, the same formula applies to compound interest on loans, though the future value would represent the total amount owed.
Q5: How accurate is this calculator for real-world applications?
A: This provides a mathematical estimate. Actual bank calculations may include additional factors like fees or minimum balance requirements.