1. What is Compound Interest?

Compound interest is the interest calculated on the initial principal and also on the accumulated interest of previous periods. It differs from simple interest in that interest is earned on interest, leading to exponential growth over time.

2. How the Calculator Works

The calculator uses the compound interest formula:

Where:

• \( A \) — Final amount
• \( P \) — Principal amount (initial investment)
• \( R \) — Periodic interest rate (annual rate divided by compounding periods)
• \( N \) — Total number of compounding periods (years × compounding frequency)

Explanation: The formula accounts for the exponential growth of money when interest is compounded over multiple periods.

3. Importance of Compound Interest

Details: Understanding compound interest is crucial for financial planning, retirement savings, and investment decisions. It demonstrates how small, regular investments can grow significantly over time.

4. Using the Calculator

Tips: Enter the principal amount, annual interest rate, time period in years, and select compounding frequency. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

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 the principal plus accumulated interest.

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

Q3: What's a typical compounding frequency for savings accounts?
A: Most savings accounts compound interest daily or monthly.

Q4: Can this calculator be used for loans?
A: While the formula is similar, loan calculators typically account for regular payments which this version doesn't include.

Q5: How accurate is this calculator?
A: It provides precise mathematical results based on the inputs, but actual bank calculations may have minor variations due to rounding methods.