Understanding Certificate of Deposit (CD) Interest
A Certificate of Deposit (CD) is a savings product offered by banks and credit unions that provides a fixed interest rate for a specified term. CDs are considered low-risk investments because they are typically insured by the FDIC (Federal Deposit Insurance Corporation) up to $250,000 per depositor, per insured bank, for each account ownership category. They offer a predictable return, making them a popular choice for conservative investors looking to grow their savings without significant risk.
How CD Interest is Calculated
The interest earned on a CD depends on several factors: the initial deposit amount (principal), the annual interest rate, the length of the term, and how often the interest is compounded. The most common method for calculating CD interest is using the compound interest formula, which accounts for interest earning interest over time.
The 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
To find the total interest earned, you subtract the principal from the future value:
Interest Earned = A - P
In our calculator, we adapt this formula. The term is given in months, so we convert it to years by dividing by 12. The annual interest rate is provided as a percentage, so we convert it to a decimal by dividing by 100.
The calculation performed by this calculator is:
Convert the annual interest rate from a percentage to a decimal: rateDecimal = annualRate / 100
Convert the term from months to years: termYears = termMonths / 12
Calculate the future value (A) using the compound interest formula: futureValue = principal * Math.pow((1 + rateDecimal / compoundingFrequency), (compoundingFrequency * termYears))
Calculate the total interest earned: interestEarned = futureValue - principal
Key Factors to Consider:
Interest Rate (APY vs. APR): Ensure you understand if the rate quoted is an Annual Percentage Yield (APY) or Annual Percentage Rate (APR). APY reflects the total interest earned over a year, including compounding, while APR does not. Our calculator uses the provided annual rate and compounding frequency to calculate the effective yield.
Compounding Frequency: More frequent compounding (e.g., daily vs. annually) generally leads to slightly higher earnings due to interest being added to the principal more often.
Term Length: Longer terms often come with higher interest rates, but they also tie up your money for a longer period.
Early Withdrawal Penalties: CDs typically have penalties for withdrawing funds before the maturity date. These penalties can significantly reduce or even eliminate the interest earned.
When to Use a CD Calculator:
This calculator is useful for:
Estimating potential earnings on a new CD deposit.
Comparing different CD offers from various financial institutions.
Determining if the interest earned justifies locking up funds for a specific term.
Financial planning to understand how much interest income you can expect from your savings.
By using this tool, you can make more informed decisions about your savings and investment strategies.
function calculateCDInterest() {
var principal = parseFloat(document.getElementById("principal").value);
var annualRate = parseFloat(document.getElementById("annualRate").value);
var termMonths = parseFloat(document.getElementById("termMonths").value);
var compoundingFrequency = parseInt(document.getElementById("compoundingFrequency").value);
var resultValueElement = document.getElementById("result-value");
var totalValueDisplayElement = document.getElementById("total-value-display");
// Clear previous results
resultValueElement.innerText = "$0.00";
totalValueDisplayElement.innerText = "";
// Input validation
if (isNaN(principal) || principal <= 0) {
alert("Please enter a valid initial deposit amount.");
return;
}
if (isNaN(annualRate) || annualRate < 0) {
alert("Please enter a valid annual interest rate.");
return;
}
if (isNaN(termMonths) || termMonths <= 0) {
alert("Please enter a valid term in months.");
return;
}
if (isNaN(compoundingFrequency) || compoundingFrequency <= 0) {
alert("Please select a valid compounding frequency.");
return;
}
var rateDecimal = annualRate / 100;
var termYears = termMonths / 12;
// Calculate future value using compound interest formula
// A = P (1 + r/n)^(nt)
var futureValue = principal * Math.pow((1 + rateDecimal / compoundingFrequency), (compoundingFrequency * termYears));
// Calculate total interest earned
var interestEarned = futureValue – principal;
// Format and display results
resultValueElement.innerText = "$" + interestEarned.toFixed(2);
totalValueDisplayElement.innerText = "Total value at maturity: $" + futureValue.toFixed(2);
}