1. What is Compound Interest?

Definition: Compound interest is interest calculated on the initial principal and also on the accumulated interest of previous periods.

Purpose: It helps investors and savers understand how their money can grow over time with reinvested earnings.

2. How Does the Calculator Work?

The calculator uses the formula:

Where:

• \( A \) — Future value of investment/loan
• \( P \) — Principal investment amount
• \( r \) — Annual interest rate (decimal)
• \( n \) — Number of times interest is compounded per year
• \( t \) — Time the money is invested/borrowed for (years)

Explanation: The formula accounts for periodic compounding where interest is added to the principal at regular intervals.

3. Importance of Compound Interest

Details: Understanding compound interest helps with financial planning, investment decisions, and loan management.

4. Using the Calculator

Tips: Enter the principal amount, annual rate (as decimal), compounding frequency per year, and time in years. All values must be positive.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between simple and compound interest?
A: Simple interest is calculated only on the principal, while compound interest is calculated on principal plus accumulated interest.

Q2: How does compounding frequency affect results?
A: More frequent compounding (daily vs. annually) results in higher returns due to interest being calculated on interest more often.

Q3: What's a typical compounding frequency?
A: Savings accounts often compound monthly (n=12), while bonds might compound annually (n=1).

Q4: How do I convert APR to decimal?
A: Divide the percentage by 100 (e.g., 5% becomes 0.05).

Q5: Can this calculator handle additional contributions?
A: No, this calculates compound interest on a single principal amount only.