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## What is the meaning of compound interest?

The interest which is added to the principal sum of the deposit or for that matter the loan is known as compounding. And when it comes to compound interest then it is the interest which is further added on the interest. If you are wondering how this work, then it turns out to be the result when the interest is reinvested instead of paying it out. This in turn is the interest in the next period which is furthermore earned on the principal sum apart from the previously – accumulated interest. Another aspect of this compound interest is that this term is standard when finance as well as the economics are in question.

## Compound Interest Calculator

### What is the difference between compound interest & simple interest?

The simple difference between compound interest & the simple interest is that in simple interest, there is no interest which is added to the principal sum hence there is no way that compounding can take place. And as such only the simple annual interest rate turns out to be the interest amount per period which is then multiplied by the number of periods on an annual basis. In addition to this, the simple annual interest rate is popular by another name such as the nominal interest rate.

## Compounding frequency

The number of times every year when the accumulated interest is stated to be paid out or for that matter is capitalized or credited to the account (& this is done on a regular basis) is known as the compounding frequency. And when it comes to frequency then it can be either daily or weekly or monthly or quarterly or half – yearly or yearly or it can be never at all till maturity.

## Effect of compounding

As far as the compounding is concerned then its effects depend on the following aspects – (1) nominal interest rate that is applied apart from the (2) frequency interest when compounded.

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## How is compound interest calculated mathematically?

**In order to calculate the compound interest, the following mathematical equation is put in to use –**

\(P^{‘}\, =\, P\, (\, 1\, +\, \frac{r}{n}\,)^{nt}\)

In the above equation, P happens to be the original principal sum while is the new principal sum. The nominal annual interest rate is represented by r whereas the compounding frequency is denoted by n. the overall length of time when the interest is applied is t.

**Total compound interest generated is represented by the following formula –**

\(P^{‘}\,=\,P\,+\,I\)

\(I\,=\,P\,(\,1\,+\, \frac{r}{n}\,)^{nt}\, -\,P\)

**Compound interest on investment calculation formula is –**

\(F\,V\,=\,P\,(\,1\,+\, \frac{i}{c}\,)^{n\times c}\)

Here FV = future value, P is principal, i is annual interest rate, c is compounding frequency & n is the number of years.

**Compound interest with regular payments formula is –**

\(F\,V\,=\,P\,(\,1+\,\frac{i}{c}\,)^{n\times c}+\frac{\,R((\,1\,+\, \frac{i}{c})^{n\times c}\,-\,1\,)}{\frac{i}{c}}\)

Here, P is principal, i = interest rate, c = compounding frequency, n is the number of years, R is the monthly contribution amount.

## How to use a compound interest calculator?

All you will have to do is enter the values in the fields provided so that you know the compound interest.