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Compound Interest Formula:
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Future Value (FV) calculation determines how much an investment made today (present value) will grow to at a future date based on a specified interest rate and compounding frequency. It's fundamental in finance for investment planning and retirement calculations.
The calculator uses the compound interest formula:
Where:
Explanation: The formula accounts for the effect of compounding, where interest is earned on both the initial principal and accumulated interest.
Details: Compound interest is a powerful concept in finance that allows investments to grow exponentially over time. Understanding it helps with retirement planning, loan decisions, and investment strategies.
Tips: Enter present value in USD, annual interest rate as decimal (e.g., 0.05 for 5%), number of compounding periods per year (e.g., 12 for monthly), and time in years. All values must be positive.
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 results?
A: More frequent compounding (e.g., monthly vs. annually) results in higher returns due to interest being calculated more often.
Q3: What's a typical compounding frequency?
A: Common frequencies are annually (1), semi-annually (2), quarterly (4), monthly (12), or daily (365).
Q4: Can this formula be used for loans?
A: Yes, it works for both investments and loans, though loans typically use amortization schedules for payments.
Q5: How does inflation affect future value?
A: Inflation reduces purchasing power. For real (inflation-adjusted) returns, subtract inflation rate from the interest rate.