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 savings accounts grow faster over time compared to simple interest accounts.

2. How the Calculator Works

The calculator uses the compound interest formula:

Where:

• \( A \) — Final amount ($)
• \( P \) — Principal amount ($)
• \( r \) — Annual interest rate (decimal)
• \( n \) — Number of compounding periods per year
• \( t \) — Time in years

Explanation: The formula accounts for how often interest is compounded, which significantly affects the final amount.

3. Importance of Compounding Frequency

Details: The more frequently interest is compounded, the greater the return. Daily compounding yields more than monthly, which yields more than annual compounding.

4. Using the Calculator

Tips: Enter principal in dollars, interest rate as percentage (e.g., 3.5 for 3.5%), select compounding frequency, and enter time in years. All values must be positive.

5. Frequently Asked Questions (FAQ)

Q1: How does this compare to simple interest?
A: Compound interest grows exponentially while simple interest grows linearly. Over time, compound interest yields significantly higher returns.

Q2: What's the difference between APR and APY?
A: APR doesn't account for compounding, while APY does. This calculator shows APY-like results.

Q3: How accurate is this calculator?
A: It provides precise mathematical calculations but doesn't account for taxes, fees, or changing rates.

Q4: Can I use this for other investments?
A: While the formula applies, other investments may have different compounding rules or variable rates.

Q5: Why does Excel use slightly different results?
A: Excel may use different rounding methods, but results should be very close (within pennies for most calculations).