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Daily Compounding Formula:
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Daily compounding interest means that interest is calculated and added to the principal balance every day. This results in faster growth compared to less frequent compounding periods because you earn "interest on interest" more frequently.
The calculator uses the daily compounding formula:
Where:
Explanation: The formula calculates how much your investment or loan will grow when interest is compounded daily, taking into account the principal, interest rate, and time period.
Details: Daily compounding can significantly increase returns on investments or costs of loans over time compared to less frequent compounding. The more frequently interest is compounded, the greater the total amount of interest accrued.
Tips: Enter the principal amount in dollars, annual interest rate as a decimal (e.g., 0.05 for 5%), and time in years. All values must be valid (principal > 0, rate ≥ 0, time > 0).
Q1: How does daily compounding compare to monthly compounding?
A: Daily compounding yields slightly higher returns than monthly compounding because interest is calculated and added more frequently.
Q2: What's the difference between APR and APY with daily compounding?
A: APR is the annual rate without compounding, while APY includes the effect of compounding. With daily compounding, APY will be higher than APR.
Q3: Is daily compounding common for loans?
A: While less common than monthly compounding, some credit cards and certain types of loans use daily compounding.
Q4: How does compounding frequency affect the total amount?
A: More frequent compounding (daily vs. monthly vs. annually) results in higher total amounts due to the "interest on interest" effect.
Q5: Can I use this for investments as well as loans?
A: Yes, the same formula applies to both investment growth and loan interest calculations when compounding is daily.