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Compound Interest Formula:
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The compound interest formula calculates the future value of an investment or loan where interest is added to the principal at regular intervals, allowing the interest to earn additional interest over time.
The calculator uses the compound interest formula:
Where:
Explanation: The formula accounts for the effect of compounding, where interest is earned on both the initial principal and the accumulated interest from previous periods.
Details: Understanding compound interest is crucial for financial planning, investment decisions, and retirement savings. It demonstrates how money can grow exponentially over time through the power of compounding.
Tips: Enter 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 (e.g., monthly vs. annually) results in higher returns due to interest being calculated and added more often.
Q3: What are typical compounding frequencies?
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 future value would represent the total amount owed.
Q5: How accurate is this calculation for real investments?
A: This provides a mathematical estimate. Actual returns may vary due to fees, taxes, and fluctuating interest rates.