Certificate of Deposit (CD) Calculator
Calculate your potential earnings on a Certificate of Deposit with daily compounding.
Your Estimated CD Growth
—Total Interest: —
Understanding Certificates of Deposit (CDs) and Daily Compounding
A Certificate of Deposit (CD) is a type of savings account offered by banks and credit unions that holds a fixed amount of money for a fixed period of time, typically ranging from a few months to several years. In exchange for keeping your money locked away for that term, the financial institution typically pays you a higher interest rate than you would earn with a standard savings account. CDs are considered a low-risk investment because they are insured by the FDIC (Federal Deposit Insurance Corporation) up to the allowable limits.
One of the most significant factors determining the growth of your CD investment is the compounding frequency. Compounding is the process where your earned interest starts earning interest itself, accelerating the growth of your principal over time. Daily compounding means that interest is calculated and added to your principal every single day. This is the most frequent compounding period available and generally leads to the highest returns compared to less frequent compounding (like monthly, quarterly, or annually), assuming the same annual interest rate and term.
The Math Behind Daily Compounding for CDs
The formula to calculate the future value of an investment with compound interest is:
FV = P (1 + r/n)^(nt)
Where:
- FV = Future Value of the investment/loan, including interest
- P = Principal amount (the initial deposit)
- r = Annual interest rate (as a decimal)
- n = Number of times that interest is compounded per year
- t = Number of years the money is invested or borrowed for
For a CD compounded daily, we need to adapt this formula slightly. We're given the term in days, and the compounding happens daily. So:
- P is the Initial Deposit.
- r is the Annual Interest Rate divided by 100 (to convert percentage to decimal).
- n = 365 (since interest is compounded daily).
- t is the Term in Days divided by 365 (to convert days into years).
Substituting these into the formula, the calculation for the future value (FV) of your CD becomes:
FV = Initial Deposit * (1 + (Annual Interest Rate / 100) / 365)^(365 * (Term in Days / 365))
This simplifies to:
FV = Initial Deposit * (1 + (Annual Interest Rate / 100) / 365)^(Term in Days)
The Total Interest Earned is then calculated by subtracting the initial deposit from the future value:
Total Interest Earned = FV - Initial Deposit
When to Use This Calculator
This calculator is ideal for:
- Estimating the potential growth of your savings when considering a CD.
- Comparing different CD offers from various banks, especially noting their advertised rates and terms.
- Understanding the benefit of daily compounding versus other compounding frequencies.
- Financial planning to see how much interest you might earn over short to medium-term savings goals.
Remember that this calculator provides an estimate. Actual earnings may vary slightly due to the specific day-count conventions used by the financial institution and any potential fees or taxes.