CD Rate Yield Calculator
Understanding CD Rate Yield
A Certificate of Deposit (CD) is a type of savings account that holds a fixed amount of money for a fixed period of time, earning a fixed rate of interest. The CD rate yield calculator helps you understand the potential return on your investment over the CD's term.
Key Components:
- Principal Amount: This is the initial sum of money you deposit into the CD.
- Annual Interest Rate: This is the yearly percentage rate of interest the CD will earn.
- Term (Months): This is the duration for which your money will be held in the CD.
- Compounding Frequency: This refers to how often the earned interest is added to the principal, and subsequently starts earning interest itself. Common frequencies include annually, semi-annually, quarterly, monthly, and daily. A higher compounding frequency generally leads to a slightly higher yield over time due to the effect of earning interest on interest more frequently.
How the Calculator Works:
The CD Rate Yield Calculator uses the compound interest formula to project your total earnings. The formula is as follows:
A = P (1 + r/n)^(nt)
Where:
- A is the future value of the investment/loan, including interest.
- P is the principal investment amount (the initial deposit).
- r is the annual interest rate (as a decimal).
- n is the number of times that interest is compounded per year.
- t is the number of years the money is invested or borrowed for.
For our calculator, we first convert the term in months to years (t = termInMonths / 12) and the annual interest rate to a decimal (r = annualInterestRate / 100). The calculator then computes the total amount (A) and subtracts the principal (P) to show you the total earned interest (yield).
Example Calculation:
Let's say you invest $10,000 (Principal Amount) in a CD with an Annual Interest Rate of 4.5% for a Term of 24 Months, and the interest is compounded Monthly (Compounding Frequency = 12).
- P = 10000
- r = 0.045 (4.5% / 100)
- n = 12 (compounded monthly)
- t = 2 (24 months / 12 months/year)
Using the formula:
A = 10000 * (1 + 0.045/12)^(12*2)
A = 10000 * (1 + 0.00375)^24
A = 10000 * (1.00375)^24
A = 10000 * 1.093806897… ≈ 10938.07
Total Yield = A – P = 10938.07 – 10000 = $938.07
This calculator helps you quickly estimate the potential earnings from different CD offerings.