Savings Account Summit National Bank

Compound Interest Formula:

\[ FV = P \times (1 + \frac{r}{n})^{(n \times t)} \]

Principal (P):

USD

Annual Interest Rate (r):

decimal

Compounding Periods per Year (n):

unitless

Time (t):

years

Future Value (FV):

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1. What is the Compound Interest Formula?

The compound interest formula calculates the future value of an investment or savings account by accounting for both the initial principal and the accumulated interest over time. It demonstrates how money can grow faster through compounding compared to simple interest.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

\[ FV = P \times (1 + \frac{r}{n})^{(n \times t)} \]

Where:

\( FV \) — Future value (USD)
\( P \) — Principal amount (USD)
\( r \) — Annual interest rate (decimal)
\( n \) — Number of compounding periods per year (unitless)
\( t \) — Time in years (years)

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

3. Importance of Future Value Calculation

Details: Understanding future value helps individuals and businesses make informed financial decisions, plan for long-term goals, and compare different investment options based on their potential returns.

4. Using the Calculator

Tips: Enter the principal amount in USD, 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 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, leading to faster growth over time.

Q2: How does compounding frequency affect returns?
A: More frequent compounding (e.g., monthly vs. annually) results in higher returns because interest is calculated and added to the principal 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 different currencies?
A: While the formula works for any currency, this calculator is specifically designed for USD as per Summit National Bank's rates.

Q5: Are there limitations to this calculation?
A: This calculation assumes a fixed interest rate and doesn't account for additional contributions, withdrawals, or changes in interest rates over time.