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 certain limits. The income generated from a CD depends on three primary factors: the principal amount invested, the annual interest rate offered, and the term length of the CD. The frequency at which the interest is compounded also plays a role in the total earnings.
How CD Income is Calculated
The calculation for CD income involves compound interest. Compound interest means that the interest earned is added to the principal, and then the next interest calculation is based on this new, larger principal. This leads to exponential growth over time.
The formula used in this calculator is the future value of an investment compounded periodically:
FV = P (1 + r/n)^(nt)
Where:
FV = Future Value of the investment/loan, including interest
P = Principal amount (the initial amount of money)
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
To find the total income generated, we subtract the initial principal from the future value:
CD Income = FV - P
Calculator Inputs Explained:
Principal Amount: This is the initial sum of money you deposit into the CD.
Annual Interest Rate: This is the yearly rate of return offered on the CD, expressed as a percentage.
Term (Months): This is the duration for which you commit your funds to the CD. The calculator converts this to years for the formula.
Compounding Frequency: This indicates how often the earned interest is added to the principal. Common options include annually (1), semi-annually (2), quarterly (4), monthly (12), and daily (365). A higher compounding frequency generally leads to slightly higher earnings.
Why Use a CD Income Calculator?
This calculator helps you:
Estimate potential earnings: See how much interest you can expect to make from a CD before committing your funds.
Compare CD offers: Easily compare different CD products from various financial institutions by inputting their specific rates and terms.
Financial planning: Determine if a CD fits into your savings goals and understand its contribution to your overall investment portfolio.
Understand the impact of variables: See how changing the principal, rate, term, or compounding frequency affects your potential income.
By using this tool, you can make more informed decisions about your savings and investments.
function calculateCdIncome() {
var principal = parseFloat(document.getElementById("principalAmount").value);
var rate = parseFloat(document.getElementById("annualInterestRate").value);
var termMonths = parseFloat(document.getElementById("termInMonths").value);
var compoundingFrequency = parseInt(document.getElementById("compoundingFrequency").value);
var resultValueElement = document.getElementById("result-value");
// Input validation
if (isNaN(principal) || principal <= 0) {
alert("Please enter a valid Principal Amount greater than zero.");
resultValueElement.textContent = "$0.00";
return;
}
if (isNaN(rate) || rate < 0) {
alert("Please enter a valid Annual Interest Rate (cannot be negative).");
resultValueElement.textContent = "$0.00";
return;
}
if (isNaN(termMonths) || termMonths <= 0) {
alert("Please enter a valid Term in Months greater than zero.");
resultValueElement.textContent = "$0.00";
return;
}
if (isNaN(compoundingFrequency) || compoundingFrequency <= 0) {
alert("Please select a valid Compounding Frequency.");
resultValueElement.textContent = "$0.00";
return;
}
var rateDecimal = rate / 100;
var termYears = termMonths / 12;
// Calculate Future Value using compound interest formula
// FV = P (1 + r/n)^(nt)
var futureValue = principal * Math.pow((1 + rateDecimal / compoundingFrequency), (compoundingFrequency * termYears));
// Calculate total income
var cdIncome = futureValue – principal;
// Display the result, formatted to two decimal places
resultValueElement.textContent = "$" + cdIncome.toFixed(2);
}