Bank Compound Interest Calculator

Compound Interest Formula:

\[ A = P \times \left(1 + \frac{r}{n}\right)^{n \times t} \] \[ \text{Interest} = A - P \]

Principal Amount (P):

Annual Interest Rate (r):

Time (t):

years

Compounds Per Year (n):

Total Amount (A):

Interest Earned:

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1. What is Compound Interest?

Compound interest is interest calculated on the initial principal and also on the accumulated interest of previous periods. It's how banks calculate interest on savings accounts and loans, allowing money to grow at an accelerating rate over time.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

\[ A = P \times \left(1 + \frac{r}{n}\right)^{n \times t} \] \[ \text{Interest} = A - P \]

Where:

\( A \) — Final amount
\( P \) — Principal amount (initial investment)
\( r \) — Annual interest rate (decimal)
\( n \) — Number of times interest is compounded per year
\( t \) — Time the money is invested for (years)

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

3. Importance of Compound Interest

Details: Understanding compound interest is crucial for financial planning. It demonstrates how investments grow over time and why starting early can significantly increase returns due to the "snowball effect."

4. Using the Calculator

Tips: Enter the principal amount in dollars, annual interest rate as a percentage, time in years, and select how often interest is compounded. 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 often do banks typically compound interest?
A: Most banks compound interest daily for savings accounts and monthly for loans, but this varies by institution.

Q3: Why does compounding frequency matter?
A: More frequent compounding results in higher returns. Daily compounding yields more than monthly, which yields more than annual compounding.

Q4: What is the Rule of 72?
A: It's a quick way to estimate how long it takes for an investment to double: 72 divided by the interest rate gives approximate years.

Q5: Can compound interest work against me?
A: Yes, with loans or credit cards, compound interest can cause debt to grow rapidly if not paid down.