What is Foolsaurus?

It's a glossary of investing terms edited and maintained by our analysts, writers and YOU, our Foolish community. Get Started Now!


How to Calculate Earnings on CD Rates

Original post by Mark Kennan of Demand Media

Knowing a CD's earnings before you invest helps you budget for your income.

With a certificate of deposit (CD), you have to leave your money in the account until it matures or pay a hefty early withdrawal penalty. The maturity period varies among CDs and can be as little as a few days or a decade or longer. To encourage people to put their money in CDs, banks offer higher interest rates with them than with regular bank accounts. Before you agree to lock your money in a CD, consider calculating the earnings you will receive to make sure it is worth your while.

Step 1

Divide the annual CD rate by the number of times per year the interest compounds. For example, if the CD compounds interest semiannually, and your annual rate equals 5.9 percent, divide 0.059 by 2 to find the semiannual rate equals 0.0295.

Step 2

Add 1 to the periodic rate. Continuing this example, add 1 to the semiannual rate of 0.0295 to get 1.0295.

Step 3

Raise the result to the number of periods over which the CD matures. Raising a number to a power is the same thing as multiplying it by itself the specified number of times. In the example, if the CD matures in 2 1/2 years, or five semiannual periods, raise 1.0295 to the fifth power to get 1.156463033.

Step 4

Subtract 1 to find the overall rate of return on your CD. In this example, take off 1 from 1.156463033 to find the overall rate of return on your CD equals 0.156463033.

Step 5

Multiply the overall rate of return by the amount invested in the CD to calculate your earnings. Completing the example, if you invested $14,290 in the CD, multiply $14,290 by 0.156463033 to find your earnings at maturity equal $2,235.86.

                   

References

About the Author

Mark Kennan is a freelance writer specializing in finance-related articles. He has worked as a sports editor for "Ring-Tum Phi" and published articles on a number of online outlets. Kennan holds a Bachelor of Arts in history and politics from Washington and Lee University.

Photo Credits

  • PhotoObjects.net/PhotoObjects.net/Getty Images

Advertisement