1. What is Compound Interest?

Compound interest is the interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods. It differs from simple interest in that interest is earned on interest.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

Where:

• \( A \) — Final amount
• \( P \) — Principal amount (initial investment)
• \( R \) — Monthly interest rate (annual rate divided by 12)

Explanation: The formula calculates how much your investment grows when interest is compounded monthly over one year.

3. Importance of Compound Interest

Details: Understanding compound interest is crucial for financial planning, investments, and loans. It demonstrates how money can grow exponentially over time.

4. Using the Calculator

Tips: Enter the principal amount in dollars and the annual interest rate as a percentage. The calculator will show the final amount after one year with monthly compounding.

5. Frequently Asked Questions (FAQ)

Q1: Why is the exponent 12 in the formula?
A: Because interest is compounded monthly (12 times per year) in this calculation.

Q2: How does compounding frequency affect results?
A: More frequent compounding leads to higher returns. Daily compounding would yield slightly more than monthly.

Q3: What's the difference between APR and APY?
A: APR is the annual rate without compounding, while APY includes compounding effects.

Q4: Can I use this for loans as well as investments?
A: Yes, the same formula applies to calculating loan balances with compound interest.

Q5: How accurate is this calculator?
A: It provides precise mathematical results assuming constant rate and no additional deposits/withdrawals.