1. What is Compound Interest?

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, as interest is earned on both the original amount and any interest already earned.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

Where:

• \( Principal \) — Initial investment amount (USD)
• \( Rate \) — Annual interest rate (as a decimal)
• \( time \) — Time period in years

Explanation: The formula calculates how much an investment will grow over time when interest is compounded annually.

3. Importance of Compound Interest

Details: Compound interest is a powerful financial concept that can significantly grow investments over long periods. It's fundamental to retirement planning, savings strategies, and understanding long-term investment growth.

4. Using the Calculator

Tips: Enter the principal amount in USD, the annual interest rate as a percentage, and the time period in years. All values must be valid (principal > 0, rate ≥ 0, time ≥ 0).

5. Frequently Asked Questions (FAQ)

Q1: How often is interest compounded in this calculator?
A: This calculator assumes annual compounding. For different compounding frequencies, the formula would need to be adjusted.

Q2: 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.

Q3: How does the time period affect compound interest?
A: The longer the time period, the more significant the effect of compound interest due to exponential growth.

Q4: Can this calculator handle monthly contributions?
A: No, this calculator only calculates compound interest on a single initial investment without additional contributions.

Q5: Is the result adjusted for inflation?
A: No, the result shows the nominal future value without accounting for inflation or taxes.