Compound Interest Calculator
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What is Compound Interest?
Compound interest is the addition of interest to the primary sum of deposit. It is the interest calculated on initial principal plus all the accumulated interest from previous periods on a deposit.
In different words it is “interest on interest”.
Interest can be compounded on any given frequency schedule, continuing from daily to annually.
When calculating compound interest, the frequency of compounding durations makes a great difference. The more the number of compounding periods, the greater the compound interest.
Compound interest calculation formula:
A = P (1 + r/n) (nt)
A = Final Amount (Principal + Interest)
P = Initial Principal Amount.
r = Rate of interest.
n = Number of compounding period per year.
t = Number of years the amount is deposited/borrowed for.
An amount of $1,000 is deposited in a bank paying an annual interest rate of 5%, compounded quarterly. What is the balance after 6 years?
Using the compound interest formula, we have that
P = 1000,
r = 5/100 = 0.05,
n = 4,
t = 6.
A = 1000 (1 + 0.05/4) (4 * 6)
A = 1000 (1 + 0.0125) (24)
A = 1000 (1.0125) (24)
A = 1000 (1.347)
A = 1347.35
So the balance after 6 years would be $ 1347.35 in which interest earned would be $347.35.
Compounding period / frequency:
A compounding period/frequency is the span of time between when interest was last compounded and when it will be compounded again. For example, annual/yearly compounding means that a full year will pass before interest is compounded again.
Compounding period are as follows –
Annually / Yearly – (1/365)
Half Yearly – (2/365)
Quarterly – (4/365)
Monthly – (12/365)
Advantages and Disadvantages of Compound interest:
Compound interest is magnificent when it works in your favour in investment, but it can be uninspiring or bad when it works against you in loans and different debts. The key is to determine how it can work in favour. If you remain on pinnacle of your loan repayments and constantly keep an eye on your investments, then compound interest can be a great asset building formula.