Yield on Investment Calculator Spreadsheet

Compound Interest Formula:

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

Principal Amount (P):

Annual Interest Rate (r):

Compounding Periods per Year (n):

Time (t):

years

Final 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 often called "interest on interest" and makes investments grow at a faster rate compared to simple interest.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

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

Where:

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

Explanation: The more frequently interest is compounded, the greater the return on investment due to the exponential growth effect.

3. Importance of Compound Interest

Details: Understanding compound interest is crucial for long-term financial planning. It demonstrates how investments grow over time and highlights the value of starting to invest early.

4. Using the Calculator

Tips: Enter the principal amount, annual interest rate (as percentage), number of compounding periods per year (e.g., 12 for monthly), and investment duration in years.

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 returns?
A: More frequent compounding (e.g., daily vs. annually) results in higher returns due to the exponential growth effect.

Q3: What's the Rule of 72?
A: A quick way to estimate how long it takes to double your money: divide 72 by the interest rate (e.g., at 6%, money doubles in ~12 years).

Q4: Are there investments that use simple interest?
A: Most savings accounts and bonds use compound interest. Simple interest is typically used for short-term loans or some types of bonds.

Q5: How can I maximize compound interest benefits?
A: Start investing early, reinvest dividends/interest, and choose investments with higher compounding frequencies when possible.