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Using 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 has the capability of producing massive gains on your investment over a set period of time. This is actually among the many reasons why this concept of investment has become something that numerous investors are so eager and interested to understand. The truth is, there are 2 ways to which interests can be calculated and these are simple and compound. In simple calculation of the interest, it’s actually the easier to be done because as what the name suggests, simple interest indicates that the principle balance is what being calculated. And with that said, to be able to calculate the simple interest, you simply need to multiply your rate of interest by the number of years that you are considering as well as your principal balance. 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. The interest stays the same every after year in simple interest.
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As for compound interest on the other hand, what is meant by this is 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. The interest is calculated as 4 percent of new balance or 416 dollars which gives you total of 10816 dollars at the end of second year. 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 that are available online as well which are intended 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.