Compound Interest Calculator

When this applies

• You want to see how a deposit or investment grows with compounding.
• You are comparing monthly, quarterly and yearly compounding.
• You are estimating the interest on a loan that compounds.
• You want to see the effect of a longer time horizon.

INR 1,00,000 at 8% compounded quarterly for 5 years

1. 1Principal INR 1,00,000, rate 8% a year, compounded quarterly, 5 years.
2. 2Quarterly rate = 8 / 4 = 2%.
3. 3Number of periods = 4 x 5 = 20.
4. 4Maturity = 1,00,000 x (1.02)^20 = about INR 1,48,595.
5. 5Compound interest = 1,48,595 - 1,00,000 = about INR 48,595.

A maturity amount of about INR 1,48,595, with interest of about INR 48,595.

What this calculator does

Work out compound interest with a compounding frequency you choose, and the maturity amount. Compounding is what makes the difference between a straight line and a curve.

How this is calculated

Compound interest is charged on the principal and on the interest already added, so the balance grows by a factor each period. The maturity amount is A = P x (1 + r/n)^(n x t), where n is the number of times a year the interest compounds, and the interest is A minus P. The more often interest compounds, the higher the maturity amount for the same rate.

The formula

A = P × (1 + r/n)^(n·t) · CI = A − P

Common mistakes to avoid

• Using the annual rate per period

  The rate must be divided by the compounding frequency. Using 8% for each quarter instead of 2% overstates the result enormously.

• Confusing the nominal and effective rate

  The nominal 8% compounded quarterly is about 8.24% a year in effect. Compare like with like across products.

• Ignoring the time horizon

  Compounding is powerful mainly over long periods. A short horizon makes it look much like simple interest.

Frequently asked

What is the compound interest formula?

A = P x (1 + r/n)^(n x t), where r is the annual rate as a decimal, n is the number of compounding periods a year and t is the time in years. Compound interest is A minus P.

Does the compounding frequency matter?

Yes. More frequent compounding adds interest to the balance sooner, so the same nominal rate produces a higher maturity amount when it compounds quarterly rather than yearly.

What is the difference from simple interest?

Simple interest is charged only on the principal. Compound interest is charged on the principal and the accumulated interest, so it grows faster over time.

Why does the gap widen over time?

The interest earns interest, so the base grows every period. Over long periods the difference from simple interest becomes large.

Is this the same as an effective annual rate?

Not directly, but the two are related. Compounding more often than yearly makes the effective annual rate higher than the nominal rate.