Understanding CD Interest and How This Calculator Works
A Certificate of Deposit (CD) is a savings product offered by banks and credit unions that typically provides a fixed interest rate for a specified term. CDs are considered a low-risk investment because they are insured by the FDIC (up to certain limits), and their interest rate is guaranteed for the duration of the term. This makes them an attractive option for individuals looking for predictable returns on their savings.
How CD Interest is Calculated
The interest earned on a CD is determined by a few key factors:
Principal Amount: The initial amount of money deposited into the CD.
Annual Interest Rate (APR): The yearly rate at which your money grows. This is usually expressed as a percentage.
CD Term: The length of time the money is deposited, usually measured in months or years.
Compounding Frequency: How often the earned interest is added back to the principal, allowing it to earn interest itself. Common frequencies include annually, semi-annually, quarterly, monthly, or even daily.
The Formula Explained
This calculator uses the compound interest formula to estimate your earnings. The general formula for compound interest is:
A = P (1 + r/n)^(nt)
Where:
A = the future value of the investment/loan, including interest
P = the principal investment amount (the initial deposit)
r = the annual interest rate (as a decimal)
n = the number of times that interest is compounded per year
t = the number of years the money is invested or borrowed for
For this calculator:
P is the Initial Deposit Amount.
r is the Annual Interest Rate divided by 100 (to convert percentage to decimal).
n is the Compounding Frequency (e.g., 12 for monthly).
t is the CD Term in months divided by 12 (to convert months to years).
The calculator first calculates the total future value (A) and then subtracts the initial principal (P) to show you the total interest earned.
When to Use This Calculator
Comparing CD Offers: If you see different CD rates and terms from various financial institutions, use this calculator to estimate potential earnings and make an informed decision.
Financial Planning: Understand how much interest you might earn over different CD terms to help you plan for short-term or medium-term financial goals.
Evaluating Investment Options: Compare the potential returns of a CD against other low-risk savings options.
Remember that this calculator provides an estimate. Actual earnings may vary slightly due to specific bank calculation methods or minor rounding differences.
var principalInput = document.getElementById("principal");
var annualRateInput = document.getElementById("annualRate");
var termMonthsInput = document.getElementById("termMonths");
var compoundingFrequencyInput = document.getElementById("compoundingFrequency");
var resultSpan = document.querySelector("#result span");
function calculateInterest() {
var principal = parseFloat(principalInput.value);
var annualRate = parseFloat(annualRateInput.value);
var termMonths = parseFloat(termMonthsInput.value);
var compoundingFrequency = parseInt(compoundingFrequencyInput.value);
if (isNaN(principal) || isNaN(annualRate) || isNaN(termMonths) || isNaN(compoundingFrequency) ||
principal <= 0 || annualRate < 0 || termMonths <= 0) {
resultSpan.textContent = "Please enter valid numbers.";
return;
}
var ratePerPeriod = (annualRate / 100) / compoundingFrequency;
var numberOfPeriods = termMonths; // In this simplified model, we are using the term in months directly as number of periods
// A more precise model would consider compounding within the term if it's not an exact multiple of the compounding period,
// but for typical CD calculations, this approach is common and sufficient.
var totalAmount = principal * Math.pow((1 + ratePerPeriod), numberOfPeriods);
var totalInterest = totalAmount – principal;
resultSpan.textContent = "$" + totalInterest.toFixed(2);
}