Understanding CD Interest and How This Calculator Works
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 generally considered low-risk investments because they are typically insured by the FDIC (Federal Deposit Insurance Corporation) or NCUA (National Credit Union Administration) up to federal limits. This calculator helps you estimate the potential earnings on your CD investment.
How the CD Interest Calculator Works
This calculator uses the compound interest formula to project your earnings. Compound interest means that your interest earnings are added to your principal, and then the next interest calculation is based on this new, larger amount. This "interest on interest" effect can significantly boost your returns over time, especially with longer terms or higher interest rates.
The formula used is the compound interest formula:
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.
In our calculator:
P is your 'Initial Deposit'.
r is your 'Annual Interest Rate' divided by 100 (to convert percentage to decimal).
n is the 'Compounding Frequency' (e.g., 12 for monthly, 4 for quarterly).
t is the 'CD Term (Months)' divided by 12 (to convert months to years).
The calculator then subtracts the initial principal (P) from the future value (A) to show you the total interest earned.
Key Terms Explained:
Initial Deposit (Principal): The amount of money you initially put into the CD.
Annual Interest Rate: The yearly rate of return you will earn on your deposit.
CD Term (Months): The length of time your money is locked into the CD. Early withdrawal often incurs penalties.
Compounding Frequency: How often the interest earned is added back to the principal. More frequent compounding generally leads to slightly higher earnings over time.
Estimated Earnings: The total interest your CD is projected to generate over its term.
When to Use This Calculator:
Comparing CD Offers: Use this calculator to compare different CD rates and terms from various financial institutions.
Financial Planning: Estimate how much interest you can earn from a CD to help meet savings goals.
Understanding Investment Growth: Visualize the power of compound interest on your savings.
Remember that this is an estimate. Actual returns may vary slightly due to factors like exact compounding days and potential fees. Always read the terms and conditions of any CD product carefully.
function calculateInterest() {
var principal = parseFloat(document.getElementById("principalAmount").value);
var rate = parseFloat(document.getElementById("annualInterestRate").value);
var months = parseFloat(document.getElementById("cdTermMonths").value);
var n = parseFloat(document.getElementById("compoundingFrequency").value);
var resultDiv = document.getElementById("result");
resultDiv.innerHTML = ""; // Clear previous results
if (isNaN(principal) || principal <= 0) {
resultDiv.innerHTML = "Please enter a valid initial deposit amount.";
return;
}
if (isNaN(rate) || rate < 0) {
resultDiv.innerHTML = "Please enter a valid annual interest rate (0% or greater).";
return;
}
if (isNaN(months) || months <= 0) {
resultDiv.innerHTML = "Please enter a valid CD term in months (greater than 0).";
return;
}
if (isNaN(n) || n <= 0) {
resultDiv.innerHTML = "Please select a valid compounding frequency.";
return;
}
var r = rate / 100; // Convert annual rate to decimal
var t = months / 12; // Convert term in months to years
// Calculate future value using the compound interest formula
// A = P (1 + r/n)^(nt)
var futureValue = principal * Math.pow(1 + r / n, n * t);
// Calculate total interest earned
var totalInterest = futureValue – principal;
// Display the result
var formattedInterest = totalInterest.toLocaleString(undefined, {
style: 'currency',
currency: 'USD'
});
resultDiv.innerHTML = formattedInterest + "Estimated Interest Earned";
}
function resetCalculator() {
document.getElementById("principalAmount").value = "1000";
document.getElementById("annualInterestRate").value = "4.5";
document.getElementById("cdTermMonths").value = "12";
document.getElementById("compoundingFrequency").value = "12"; // Default to Monthly
document.getElementById("result").innerHTML = "";
}