1. What is the Compound Interest Formula?

The compound interest formula calculates the future value of an investment or savings account by accounting for interest earned on both the initial principal and the accumulated interest from previous periods.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

Where:

• \( FV \) — Future value (GBP)
• \( P \) — Principal amount (GBP)
• \( r \) — Annual interest rate (decimal)
• \( n \) — Compounding periods per year
• \( t \) — Time in years

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

3. Importance of Compound Interest Calculation

Details: Understanding compound interest is crucial for financial planning, investment decisions, and maximizing savings growth over time.

4. Using the Calculator

Tips: Enter principal in GBP, annual interest rate as a decimal (e.g., 0.05 for 5%), number of compounding periods per year, and time in years. All values must be positive.

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 (e.g., monthly vs. annually) results in higher returns due to interest being calculated more often.

Q3: What are typical compounding periods?
A: Common compounding periods 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 represents the total amount owed.

Q5: How accurate is this calculation for real-world investments?
A: This provides a mathematical estimate. Actual returns may vary due to fees, tax implications, and fluctuating interest rates.