Certificate of Deposit (CD) Calculator

What is a Certificate of Deposit (CD)?

A Certificate of Deposit (CD) is a savings account that holds a fixed amount of money for a fixed period of time, such as 6 months, 1 year, or 5 years. In exchange for leaving the money untouched for that period, banks offer a higher interest rate than on standard savings accounts. CDs are considered to be one of the safest savings options, as they are typically insured by the FDIC up to $250,000.

The CD Interest Formula

The formula for calculating CD interest is:

\[A = P(1 + \frac{r}{n})^{nt}\]

Where:

• \(A\) = Final amount
• \(P\) = Principal amount (initial deposit)
• \(r\) = Annual interest rate (in decimal form)
• \(n\) = Number of times interest is compounded per year
• \(t\) = Number of years

Step-by-Step CD Interest Calculation

1. Identify the principal amount (P), annual interest rate (r), compounding frequency (n), and term (t).
2. Convert the annual interest rate to decimal form (divide by 100).
3. Divide the annual rate by the compounding frequency to get the periodic rate.
4. Multiply the compounding frequency by the number of years to get the total number of compounding periods.
5. Plug these values into the CD interest formula.
6. Calculate the final amount (A).
7. Subtract the principal from the final amount to get the interest earned.

Example Calculation

Let's calculate the CD interest for a principal of $10,000, an annual interest rate of 2.5%, compounded monthly, over 2 years:

1. \(P = \$10,000\), \(r = 2.5\% = 0.025\), \(n = 12\) (monthly compounding), \(t = 2\) years
2. Periodic rate = \(0.025 \div 12 = 0.002083\)
3. Total compounding periods = \(12 \times 2 = 24\)
4. \(A = 10000(1 + 0.002083)^{24} = \$10,506.33\)
5. Interest earned = \$10,506.33 - \$10,000 = \$506.33

Visual Representation

The green portion represents the principal ($10,000), and the blue portion represents the CD interest earned ($506.33).