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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, resulting in interest earning interest over time.
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 period.
Details: Understanding compound interest is crucial for financial planning, investment decisions, and evaluating the true cost of loans. It demonstrates the power of time and consistent compounding on wealth accumulation.
Tips: Enter the principal amount in dollars, 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.
Q2: How does compounding frequency affect the result?
A: More frequent compounding (higher n value) results in higher returns as interest is calculated and added more often.
Q3: What are common compounding frequencies?
A: Common frequencies include annually (1), semi-annually (2), quarterly (4), monthly (12), and daily (365).
Q4: Can this formula be used for loans?
A: Yes, the same formula applies to both investments and loans, though for loans it calculates the total amount to be repaid.
Q5: How accurate is this calculation for real-world investments?
A: While mathematically accurate, real-world results may vary slightly due to rounding practices, fees, or changing interest rates.