CD Calculator
A CD calculator is a handy tool that can help you quantify the annual percentage yield and interest income offered by a certificate of deposit. The best calculators are very straightforward, offering some basic educational content and easy-to-interpret results. To use a CD calculator, all you need is the amount to be deposited, the number of months until maturity, the published interest rate and the compounding frequency of the CD.
- Written By Thomas J. Brock, CFA®, CPAThomas J. Brock, CFA®, CPA
Thomas J. Brock, CFA®, CPA
Investment, Corporate Finance and Accounting Professional
Thomas Brock, CFA®, CPA, is a financial professional with over 20 years of experience in investments, corporate finance and accounting. He currently oversees the investment operation for a $4 billion super-regional insurance carrier.
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Toby Walters, CFA®, CFP®Toby Walters, CFA®, CFP®
Toby Walters, CFA®, CFP®
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What Is a CD Calculator and Why Do I Need One?
A CD calculator is a tool that allows you to quickly quantify the effective annual interest rate and interest income offered by a CD. This is important because some CD issuers use vague information to market their products and fail to convey the actual economic value offered.
So, this type of calculator allows you to cut through that ambiguity and get a clear understanding of the financial benefit of a CD. Ultimately, this enables you to perform comparative evaluations of potential investments and optimize your decisions.
A certificate of deposit (CD) is a high-quality, low-risk savings vehicle offered by commercial banks and credit unions to their customers. CD structures vary, but most provide a fixed rate of interest in exchange for a commitment to lock up the invested funds for a set term. Early withdrawal typically results in a loss-of-interest penalty.
How To Use Our CD Calculator
You will need to provide some information in order to use the calculator.
- Initial Deposit
- This is the amount of money you intend to invest in the CD.
- Months
- This is the number of months until maturity of the CD (3 months, 6 months, 12 months, 24 months, etc.).
- Interest Rate
- This is the published, annualized interest rate for the CD. This is not the annual percentage yield. Instead, it is the simple interest rate marketed by the issuing institution before consideration for the compounding of interest.
- Compounding
- Compounding frequency refers to the number of times per year that interest income is computed and added to your principal balance, which facilitates the accumulation of “interest on interest.” The most common compounding frequencies are daily, monthly, quarterly, semiannually and annually. The more frequent the compounding, the faster your CD investment will grow.
Once you have the aforementioned information on hand, take the following steps to determine how much you will earn from the CD.
3 Steps To Use the Calculator
- Input each item into the appropriate box.
- Select the “Calculate” button, which will instantaneously generate the annual percentage yield and interest income offered by the CD.
- For additional insight, click on the “View Report” button for a detailed schedule of the CD balance and interest earned over time.
How This Calculator Determines CD Interest
The calculator determines the end value of a CD through a mathematical formula:
APY = (1 + 0.05000 ÷ 365) ^ 365 – 1 = 0.05127 or 5.127%
Then, you can calculate the ending value of the CD as follows:
Ending CD Value = Invested Amount × (1 + APY) ^ (Term ÷ 12)Ending CD Value = $10,000.00 × (1 + 0.05127) ^ (24 ÷ 12) = $11,051.63
The difference between the initial investment ($10,000.00) and the ending balance ($11,051.63) is the interest income earned over the life of the CD. If you run the inputs through the CD calculator, you’ll get the same result.
Average CD Rates
Once a month, the Federal Deposit Insurance Corporation (FDIC) publishes national average rates for CDs. The term-specific data points reflect deposit-weighted averages of the rates paid by all insured banks and credit unions for which the FDIC has data.
This resource is a good starting point for determining whether a CD rate is competitive, but matching the national average is not a great investing achievement. Rather, you should strive to find the highest available rates in the market, which tend to be about five times higher than the national average, regardless of the interest rate environment.
CDs reflect various terms, usually between one month and five years. Generally, the longer the term, the higher the interest rate, holding all else constant.
Minimum deposit requirements also vary. At the low end, you may be required to invest a few hundred dollars; at the high end, the requirement could be hundreds of thousands of dollars. Generally, the more money you deposit, the higher the interest rate, again, holding all else constant.
Generally, the highest CD rates you will ever see are comparable to the rate of inflation. Higher yields are usually rare.
Other Frequently Asked Questions About Certificates of Deposit
CDs require you to lock up your money until the specified maturity date. Early withdrawals are subject to loss-of-interest penalties. In some situations, loss of principal is possible.
Additionally, CDs are exposed to inflation risk, which is the possibility that widespread price increases will exceed the fixed-rate income offered by these instruments. Ultimately, this erodes purchasing power and reduces the real value of your money.
CD rates are largely influenced by the Federal Reserve’s monetary policy actions and the resulting position of the federal funds rate, which is the overnight lending rate for commercial banks and the foundation for all longer-term lending arrangements. When the Fed increases or decreases the federal funds rate, banks and credit unions usually respond by moving their CD rates in the same direction. That said, there is always the possibility for deviation from the federal funds rate, which occurs any time a financial institution looks to adjust its competitive positioning in the deposit-seeking market.
Remember, the longer the CD term, the higher the interest rate you can usually obtain, holding all else constant. In many instances, you can also obtain a higher interest rate by increasing the amount of your deposit.
CDs are offered by most commercial banks and credit unions. The process of investing in a CD is just like opening a traditional checking or savings account. You need to apply online or in-person with the issuing financial institution, which requires disclosure of some personal information and the deposit of the funds you wish to invest, usually either via ACH transfer, check or cash.
CDs are among the safest investment vehicles in the market. If structured properly, a CD is fully ensured up to $250,000 for an individual account and $500,000 for a joint account. The FDIC insures CDs issued by banks, and the National Credit Union Administration (NCUA) insures CDs issued by credit unions.
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