Compound interest calculator

How to use the compound interest calculator

Using our compound interest calculator is simple and quick. Just follow the steps below:

• Select the currency corresponding to your country.
• Enter the amount you plan to invest at the beginning.
• If you plan to add a fixed amount monthly, enter it here. If not, enter zero.
• Enter the interest rate, which can be monthly or annual depending on your choice.
• Choose between "monthly" or "annual" to specify how the interest rate will be applied.
• Enter the duration of the investment.
• Select whether the investment period is in months or years.
• Click "Calculate" to obtain detailed results of your investment.

What is an Interest Rate?

An interest rate is the percentage charged by a lender to a borrower for the use of money or paid by a bank or financial institution to a depositor for keeping their money. It's typically expressed as an annual percentage rate (APR).

For example, if you take a loan of $10,000 with an interest rate of 5%, you will owe $500 annually for using that money.

Why Do Interest Rates Exist?

Interest rates exist to compensate lenders for opportunity cost, as when lenders provide money to borrowers, they cannot use it elsewhere. The interest ensures they are compensated for the missed opportunities. They also exist to offset risk, as lending money involves risk, and borrowers might default. Higher interest rates help offset potential losses.

Additionally, interest rates account for inflation because, over time, money loses value due to inflation. Interest rates ensure lenders' returns stay above inflation, preserving their purchasing power.

Importance of Interest Rates in Investments

Interest rates play an essential role in investments. They determine the cost of borrowing, as for businesses, lower interest rates reduce the cost of loans, encouraging investment in new projects and growth. They influence savings growth, as for individuals, interest rates determine how much their savings will grow in a bank or fixed-income instrument.

Furthermore, they affect the market, as higher interest rates often make bonds and savings accounts more attractive, pulling money out of riskier investments like stocks, whereas lower rates can drive more investment into equities.

Impact on the Economy

Interest rates impact the economy in several ways. They influence consumer behavior, as higher rates increase borrowing costs, discouraging loans for houses, cars, and credit cards. They also affect corporate investments, as lower rates make it cheaper for businesses to finance operations or expansion.

Lastly, they shape global markets, as interest rate differentials between countries influence foreign exchange rates and cross-border investments.

What is Compound Interest?

Compound interest is the interest calculated not only on the principal amount (the original sum of money) but also on the accumulated interest from previous periods. In other words, it is "interest on interest." This compounding effect causes the investment or loan balance to grow at a faster rate compared to simple interest.

The formula for compound interest is:

Onde:

• A = Final amount (principal + interest)
• P = Principal amount
• r = Interest rate per period
• n = number of periods

For example, if you invest $1,000 at an annual interest rate of 5% compounded yearly for three years, the balance will grow as follows:

• 1st year: $1,000 × 1.05 = $1,050
• 2nd year: $1,050 × 1.05 = $1,102.50
• 3rd year: $1,102.50 × 1.05 = $1,157.63

Applications of Compound Interest

Compound interest is widely applied in various financial contexts. It is used in savings and investments, as banks calculate returns on savings accounts, certificates of deposit (CDs), and investment accounts using compound interest, allowing savings to grow significantly over time.

It also applies to loans and mortgages, where lenders calculate interest on certain types of loans, such as credit cards, mortgages, and student loans, with borrowers paying interest on the outstanding balance, including previously accrued interest.

Difference Between Compound Interest and Simple Interest

The difference between compound interest and simple interest lies in how they are calculated and their growth patterns. Simple interest is calculated only on the principal amount using the formulat I = P × r × t, where I is the interest, P is the principal, r is the interest rate, and t is the time in years. In contrast, compound interest includes interest on both the principal and the accumulated interest, leading to exponential growth.

The growth pattern also differs: simple interest results in linear growth, where the amount of interest added remains the same for each period, while compound interest grows exponentially, with the interest increasing progressively as it is calculated on a growing balance.

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