How does compound interest work's

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Compound interest is a concept in finance where interest is not only earned on
 the initial amount invested or deposited but also on the accumulated interest from previous periods. In simple terms, compound interest allows your money to grow faster over time.

The formula for compound interest is A = P(1 + r/n)^(nt), where:

A = the future value of the investment/loan
P = the principal amount (initial investment/loan)
r = annual interest rate (expressed as a decimal)
n = number of times interest is compounded per year
t = number of years

To understand how it works, let's consider an example: Suppose you invest $1,000 with an annual interest rate of 5%, compounded annually (n = 1), for a period of 5 years (t = 5). Plugging these values into the formula, you would get:

A = 1000(1 + 0.05/1)^(1*5)
A = 1000(1.05)^5
A ≈ $1276.28

The result shows that your initial investment of $1,000 will grow to approximately $1,276.28 after 5 years with compound interest. This growth occurs because the interest earned each year is added to the principal amount, creating a compounding effect.

Compound interest is widely used in savings accounts, loans, mortgages, and investments to maximize returns or determine the cost of borrowing. It is important to understand the terms and compounding frequency associated with a financial product to make informed decisions and manage your finances effectively.

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