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Compound Interest Formula:
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The compound interest formula calculates the interest earned on both the initial principal and the accumulated interest from previous periods. It demonstrates how investments grow over time through the power of compounding.
The calculator uses the compound interest formula:
Where:
Explanation: The formula calculates how much your initial investment grows when interest is compounded at regular intervals over time.
Details: Understanding compound interest is essential for financial planning, investment decisions, and retirement savings. It shows how money can grow exponentially over time.
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 because interest is calculated and added more often.
Q3: What is a typical compounding frequency?
A: Common frequencies include annually (n=1), semi-annually (n=2), quarterly (n=4), monthly (n=12), and daily (n=365).
Q4: Can this formula be used for loans as well?
A: Yes, the same formula applies to compound interest on loans, though the result would represent the interest you pay rather than earn.
Q5: How accurate is this calculation for real-world investments?
A: This provides a mathematical ideal. Real-world returns may vary due to fees, taxes, and fluctuating interest rates.