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Compound Interest Formula:
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Compound interest is the interest calculated on the initial principal and also on the accumulated interest of previous periods. It allows investments to grow exponentially over time, making it a powerful concept in finance.
The calculator uses the daily compound interest formula:
Where:
Explanation: The formula calculates how much an investment grows when interest is compounded daily, with the annual rate divided by 365 to get the daily rate.
Details: Daily compounding maximizes investment growth compared to less frequent compounding periods. Even small daily interest additions can significantly increase returns over time, especially for long-term investments.
Tips: Enter the principal amount in dollars, annual interest rate as a decimal (e.g., 0.05 for 5%), and the time period in days. All values must be positive numbers.
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 both the principal and accumulated interest.
Q2: How does daily compounding compare to monthly compounding?
A: Daily compounding typically yields slightly higher returns than monthly compounding because interest is added more frequently.
Q3: Can I use this calculator for different compounding frequencies?
A: This calculator is specifically designed for daily compounding. For other frequencies, different formulas would be needed.
Q4: What is the rule of 72 in compound interest?
A: The rule of 72 estimates how long it takes for an investment to double by dividing 72 by the annual interest rate.
Q5: Are there any limitations to this calculation?
A: This calculation assumes a fixed interest rate and doesn't account for additional contributions, taxes, or fees that may affect actual investment returns.