How Our Compound Interest Calculator Works
Technical explanation of the compound interest formula, compounding frequency effects, and calculation methodology.
The compound interest formula
Our calculator uses the standard formula: A = P(1 + r/n)^(nt), where A is the final amount, P is the principal, r is the annual interest rate as a decimal, n is the compounding frequency per year, and t is the time in years.
Compounding frequency options
| Frequency | n value | Use case |
|---|---|---|
| Annually | 1 | Bonds, some savings |
| Semi-annually | 2 | Some bonds |
| Quarterly | 4 | Some savings accounts |
| Monthly | 12 | Most savings, loans |
| Daily | 365 | Credit cards, some accounts |
APR vs APY
The calculator uses the nominal annual rate (APR). The effective annual rate (APY) after compounding is higher. For example, 12% APR compounded monthly gives an APY of 12.68%, meaning you effectively earn 12.68% per year.
Limitations
The calculator assumes a constant interest rate, which is unrealistic for most investments. It does not account for inflation, taxes, fees, or investment risk. Use it for education and illustration, not as a guarantee of future returns.
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