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What Is A Compound Interest Calculator? Compound interest means that the interest is paid not just to principal balance of account but to other interest that it accumulated previously as well. Compound interest can produce massive gains onto your investment over a long period time. This is exactly the primary reason why such concept of investing is something that a lot of investors are so eager and interested to understand. As a matter of fact, there are a couple of ways in which interests could be calculated and these are simple and compound. When it comes to simple calculation of interest, it is actually easier to be carried out as what the name suggests, simple interest means that the principle balance is what being calculated. And with this being said, to be able to calculate simple interest, you just have to multiply your rate of interest by number of years that you’re considering and your principal balance too. As a quick example to how simple interest calculation works, say that you have bought a bond for 1000 dollars that pays 5 percent simple interest for 30 years, you are going to receive 50 dollars annually for the next 30 years as interest payment, which is a total of 1500 dollars in interest. In simple interest, the interest stays the same every after year.
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In compound interest on the other hand, this means that the interest is paid on principal balance and any interest that it has accumulated previously. For instance, if you have invested 10000 dollars on sometime with a compound interest of 4 percent, then you are going to receive 400 dollars in interest after the first year which gives you a total amount of 10,400 dollars. But as the second year of your account ends, the interest is then calculated as 4 percent of new balance or 416 dollars which gives you a total of 10816 dollars. This process is repeated for the following years.
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As for the formula in computing compound interest, it is A = P (1+r)t in which A is the ending amount of money, while P is the principal and r is the interest rate that’s expressed as decimal so 5% is equivalent to .05 and t is the number of time in years. There are compound interest calculators available online that are meant primarily for the purpose of getting an estimate and not for financial advice or planning. As with any other tool, it’s only as accurate as assumptions it is making as well as the data that it has and something that you shouldn’t totally rely on as substitute for a tax professional or a financial advisor.