CD Calculator

What is a Certificate of Deposit?

A Certificate of Deposit (CD) is a time deposit offered by banks and credit unions that provides a fixed interest rate for a specified term. Unlike savings accounts, CDs require you to commit your money for a set period, typically ranging from a few months to several years. In exchange for this commitment, banks generally offer higher interest rates compared to regular savings accounts.

How Certificates of Deposit Work

When you open a CD, you agree to leave your money deposited for a fixed term. In return, the financial institution pays you a fixed interest rate that is typically higher than what you would earn in a standard savings account. At the end of the term (maturity date), you can withdraw your initial deposit plus the accumulated interest or renew the CD for another term.

CD Interest Calculation Formula

The future value of a Certificate of Deposit with compound interest is calculated using the formula:

Where:

• A = Final account balance
• P = Initial principal balance
• r = Annual interest rate (in decimal form)
• n = Number of times interest is compounded per year
• t = Time the money is invested for (in years)

Annual Percentage Yield (APY)

APY is the effective annual rate of return taking into account the effect of compounding interest. The formula for APY is:

APY provides a more accurate measure of the actual return on your investment compared to the nominal interest rate.

Early Withdrawal Penalties

CDs typically impose penalties if you withdraw your money before the maturity date. These penalties vary by institution but commonly include:

• Interest Penalty: Forfeiting a certain number of months’ worth of interest (e.g., 3 months, 6 months, or 12 months)
• Principal Penalty: A percentage of the principal amount (less common)

These penalties can significantly reduce or even eliminate your earnings, so it’s important to choose a CD term that matches your financial timeline.

Types of CDs

• Traditional CDs: Fixed interest rate and fixed term
• Bump-up CDs: Allow you to request a rate increase if market rates rise
• Step-up CDs: Have predetermined rate increases at specific intervals
• Liquid CDs: Allow some penalty-free withdrawals before maturity
• Callable CDs: Can be “called” or redeemed by the bank before maturity
• Brokered CDs: Sold through brokerage firms and may be traded on a secondary market

Benefits of Certificates of Deposit

• Higher Interest Rates: CDs typically offer better returns than traditional savings accounts
• Fixed Returns: Your interest rate is guaranteed for the entire term
• Safety: CDs are FDIC-insured up to $250,000 per depositor, per institution
• Predictable Growth: You know exactly how much you’ll earn at maturity
• Low Risk: CDs are considered one of the safest investment options

Considerations Before Opening a CD

• Liquidity: Your money is tied up for the entire term, with penalties for early withdrawal
• Inflation Risk: If inflation rises above your CD’s interest rate, your purchasing power may decrease
• Opportunity Cost: If interest rates rise, you’re locked into the lower rate until maturity
• Minimum Deposits: Many CDs require higher minimum deposits than savings accounts
• Reinvestment Risk: When your CD matures, you may have to reinvest at lower prevailing rates