### CD Calculator

### What is a Certificate of Deposit (CD)?

A certificate of deposit is very similar to depositing money into a savings account – the biggest difference being that the money in the CD is usually “locked in” for a period of time (and because of that typically is rewarded with a higher interest rate).

### How is Compound Interest on a CD calculated?

Compound interest on a CD is calculated using a simple time value of money financial formula.

It is important to note that the interest rate (APR) used is adjusted to be the same as the compounding period – with monthly compounding, an interest rate of 1.2% would be calculated as 0.1% per month, while with quarterly compounding the same interest rate would be adjusted to 0.3% per quarter.

On a very basic level, what is happening is that each compounding period is that the interest on the CD is calculated and kept within the investment (earning even more interest the next time the investment is compounded).

At the next time compounding period, the total amount in the investment (the initial investment plus interest earned so far) earns interest.

As time goes on, the investor is earning interest on the interest earned which creates a larger amount of interest earned each accruing period.

### CD interest formula

It is important to note that the interest rate (APR) used is adjusted to be the same as the compounding period – with monthly compounding, an interest rate of 1.2% would be calculated as 0.1% per month, while with quarterly compounding the same interest rate would be adjusted to 0.3% per quarter.

At the same time, the number of compounding periods needs to be adjusted as well – with annual compounding, a 36 month CD would have 3 (36 months / 12 months per year) compounding periods, while a with weekly compounding the same CD would have 156 (36 months / 12 months per year x 52 weeks per year) compounding periods.

### Example

A deposit of $1,000 is made on a CD that is 36 months in length at an annual percentage rate of 0.75% and is compounded Monthly.

Therefore, this CD would have a value of $1,022.75 at the end of the term.

### What is the initial deposit?

The initial deposit is the amount initially invested in the CD.

### What are months?

Months are the amount of total time that the investment is held in the CD.

Most CDs are invested in a period of years, however there are some that are invested for shorter terms (or partial years).

### What is the annual interest rate?

This is the interest rate that is earned annually on the deposit.

The annual interest rate is different than the annual percentage yield (APY).

### What is the compounding period?

The compounding period is how frequently the account is updated with each interest deposit.

Shorter compounding periods typically yield more interest over the term than longer compounding periods with the same interest rate.

### Sources and External Resources

- Wikipedia – Time Deposit
- Wikipedia – Certificate of Deposit
- FDIC – Insured or Not Insured?
- SEC – High Yield CDs – Protect your money by checking the fine print
- FDIC – Thinking of buying a CD? What to consider before handing over your money