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Compound Interest Formula:
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The compound interest formula calculates the future value of an investment or loan based on the principal amount, interest rate, compounding frequency, and time period. It demonstrates how money grows over time through the power of compounding.
The calculator uses the compound interest formula:
Where:
Explanation: The formula calculates how much an investment will grow when interest is compounded at regular intervals over a specified time period.
Details: Calculating future value helps investors understand the potential growth of their savings, compare different investment options, and plan for long-term financial goals such as retirement or education funding.
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.
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 exponential growth.
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 periods?
A: Common compounding 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 both investments and loans, though for loans it calculates the total amount owed rather than earned.
Q5: How accurate is this calculation for real-world investments?
A: This provides a mathematical estimate. Actual returns may vary due to fees, taxes, and fluctuating interest rates in real investment products.