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 what makes high-yield accounts grow faster over time compared to simple interest accounts.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

Where:

• \( P \) — Principal amount ($)
• \( r \) — Annual interest rate (decimal)
• \( n \) — Number of compounding periods per year
• \( t \) — Time the money is invested for (years)

Explanation: The formula accounts for the exponential growth of money when interest is compounded multiple times per year.

3. Importance of Interest Calculation

Details: Understanding compound interest helps investors compare different high-yield accounts and make informed decisions about where to place their money for optimal growth.

4. Using the Calculator

Tips: Enter principal in dollars, annual rate as decimal (5% = 0.05), compounding frequency (12 for monthly), and time in years. All values must be positive.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between APR and APY?
A: APR is the annual rate without compounding, while APY includes compounding effects. This calculator shows the actual interest earned (APY equivalent).

Q2: How often do high-yield accounts compound?
A: Most compound daily (n=365), but check with your financial institution as policies vary.

Q3: Why does compounding frequency matter?
A: More frequent compounding leads to slightly higher returns due to interest being calculated on interest more often.

Q4: Are there limits on high-yield accounts?
A: Some have minimum balances, withdrawal limits, or tiered interest rates based on balance amounts.

Q5: Is the interest taxable?
A: Yes, interest earned is typically taxable as ordinary income in the year it's credited to your account.