Short-Term Deposit Calculator

What is a Short-Term Deposit?

A short-term deposit is a financial instrument where you deposit money with a bank or financial institution for a fixed period, typically less than one year. In return for keeping your money with the institution, you receive interest on your deposit. Short-term deposits are popular for their relatively low risk and quick access to funds compared to longer-term investments.

The Short-Term Deposit Interest Formula

The formula for calculating short-term deposit 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 Short-Term Deposit 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 short-term deposit 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 short-term deposit interest for a principal of $5,000, an annual interest rate of 2%, compounded monthly, over 6 months:

1. \(P = \$5,000\), \(r = 2\% = 0.02\), \(n = 12\) (monthly compounding), \(t = 0.5\) years (6 months)
2. Periodic rate = \(0.02 \div 12 = 0.001667\)
3. Total compounding periods = \(12 \times 0.5 = 6\)
4. \(A = 5000(1 + 0.001667)^{6} = \$5,050.15\)
5. Interest earned = \$5,050.15 - \$5,000 = \$50.15

Visual Representation

The green portion represents the principal ($5,000), and the blue portion represents the short-term deposit interest earned ($50.15).