1. What is Compound Interest?

Compound interest is the addition of interest to the principal sum of a loan or deposit, where the interest that has been added also earns interest. This differs from simple interest where only the principal earns interest.

2. How Does the Calculator Work?

The calculator uses the daily compound interest formula:

Where:

• \( A \) — Future value of the investment
• \( P \) — Principal investment amount
• \( r \) — Annual interest rate (decimal)
• \( days \) — Time period in days

Explanation: The formula calculates how much an investment will grow when interest is compounded daily.

3. Importance of Daily Compounding

Details: Daily compounding means interest is calculated and added to the principal every day, leading to faster growth compared to monthly or annual compounding.

4. Using the Calculator

Tips: Enter the principal amount in USD, annual interest rate as a decimal (e.g., 0.05 for 5%), and the time period in days. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: How is this different from simple interest?
A: Simple interest only earns interest on the principal, while compound interest earns "interest on interest."

Q2: Why divide by 365 in the formula?
A: This converts the annual rate to a daily rate by dividing by the number of days in a year.

Q3: Does this account for leap years?
A: The standard formula uses 365 days. For more precision, you could use 365.25 to account for leap years.

Q4: Can I use this for monthly compounding?
A: No, this calculator is specifically for daily compounding. The formula would be different for other compounding periods.

Q5: How accurate is this calculation?
A: This provides a mathematical estimate. Actual bank calculations may vary slightly due to rounding methods or different day count conventions.