Explain APY on 3 Month CD
When investing in a certificate of deposit, you want to take advantage of the best interest rates possible for a certain maturity term. The biggest advantage of a short-term CD is that your money is locked in for a short amount of time, but you need to understand the CD's annual percentage yield (APY), which determines your return.
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What Is APY?
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CDs are usually advertised with the APY, which expresses an annual yield on the deposit that takes into account the compounding of interest. The APY is higher when there are more frequent compounding periods. The APY's percentage number assumes the funds will remain in the CD for 365 days, even for a three-month CD.
APY Payment
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The APY is paid to a CD depositor by the bank. A three-month CD holder will receive the full APY due on the deposit after the CD matures.
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APY vs. APR
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The APY is different from the APR, or annual percentage rate. APR is an annual rate of interest that doesn't take into account the compounding of interest within the year.
APY Calculation
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APY is calculated according to the formula (1 + r/n )n -- 1, where r is the annual interest rate expressed as a decimal and n is the number of times the interest compounds in a year.
Rates and Investment Amount
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Some three-month CDs are available for as low as $500 invested. But a larger investment can mean a higher interest rate and APY. Also, when banks are unsure where interest rates are going, they may offer better rates for short-term CDs. When banks are confident about the direction of future rates, they may offer better rates for a long-term CD.
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