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Compound Interest Formula:
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Compound interest is the interest calculated on the initial principal and also on the accumulated interest of previous periods. It's often described as "interest on interest" and can cause wealth to grow exponentially 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 time period.
Details: Understanding compound interest is crucial for financial planning, investment decisions, retirement savings, and loan calculations. It demonstrates the power of time and consistent investing.
Tips: Enter principal amount in currency units, annual interest rate as a decimal (e.g., 0.05 for 5%), compounding frequency as times per year, and time period 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 principal and accumulated interest.
Q2: How does compounding frequency affect the result?
A: More frequent compounding (daily vs. annually) results in higher accumulated amounts due to interest being calculated 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 calculator be used for loans?
A: Yes, the same formula applies to compound interest loans, though the perspective changes from investment growth to debt accumulation.
Q5: How accurate is this calculation for real-world scenarios?
A: This provides a mathematical ideal. Real-world results may vary due to fees, taxes, and fluctuating interest rates.