The Fair Market Value of Certificate of Deposit
A certificate of deposit (CD) is an investment vehicle in which you deposit a specific amount of money (usually at least $5,000) with a bank for a preset term in return for being paid interest on that money. The money usually cannot be withdrawn early without you taking a substantial interest penalty. The fair market value of a simple fixed-interest certificate of deposit can be determined fairly easily and is something bankers do almost every day. Calculating the fair market value for other types of CDs that pay interest rates linked to equities or securities (money market CDs etc.) is complex and has to be done by the financial institution.
Other People Are Reading
-
What is Fair Market Value
-
The fair market value of a certificate of deposit is how much it is worth at any given point in time (principal amount + interest). For a large CD ($1,000,000 or more) just one week's interest can represent a substantial sum of money.
Determining Fair Market Value
-
The fair market value of a certificate of deposit can be determined for any given point in time by calculating the interest that will have accumulated up to that point and adding it to the original investment amount. Assuming it is a fixed interest rate on the CD, fair market value can be determined for any point in the future up to the maturation of the CD.
-
Early Withdrawal Penalty
-
If you are determining fair market value for a CD before it matures, you must also subtract the penalty for early withdrawal to calculate the exact fair market value. If you are calculating the fair market value of the CD at maturity, then you just add the accrued interest to the principal.
Example No. 1 - Fair Market Value of a CD at Maturity
-
If you had a $100,000 one-year CD paying 2 percent interest (compounded annually) and wanted to calculate the fair market value at maturity you would multiply 100,000 X .02 to get $2,000 in interest, and add that to the original principal amount $100,000 + $2,000, to get a fair market value of $102,000 for the CD at maturity.
Example No. 2 - Fair Market Value of a CD Before Maturity
-
If you had a $100,000 one-year CD at 2 percent interest (compounded annually) and wanted to determine the fair market value at six months before maturity you would multiply 100,000 by .01 to get $1,000 in interest, and add that to the principal amount $100,000 + $1,000, then subtract an early withdrawal penalty (three months interest or $500 in this case), to come up with a fair market value of $100,500 for the CD at six months.
-
References
- Photo Credit money deposit image by max blain from Fotolia.com
