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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 allows investments to grow exponentially over time, making it a powerful concept in finance and investing.
The calculator uses the compound interest formula:
Where:
Explanation: The formula calculates how much an investment will grow over time when interest is compounded. Each period, interest is earned on both the original principal and any previously earned interest.
Details: Compound interest is fundamental to long-term wealth building. It demonstrates why starting to invest early and allowing investments to compound over time can lead to significant financial growth.
Tips: Enter present value in currency units, interest rate as a decimal (e.g., 0.05 for 5%), and number of compounding periods. 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 results?
A: More frequent compounding (monthly vs. annually) results in higher returns. This calculator assumes compounding occurs once per period.
Q3: What is the Rule of 72?
A: The Rule of 72 estimates how long it takes for an investment to double: 72 divided by the interest rate gives the approximate number of years.
Q4: Can this calculator be used for loans?
A: Yes, it can calculate the future value of loans, but for loan amortization, more detailed calculations are usually needed.
Q5: What are common compounding periods?
A: Common periods include annually, semi-annually, quarterly, monthly, or daily, depending on the financial instrument.