How to Calculate Earnings on a CD
Certificates of deposit, or CDs, are fixed-rate time deposits that banks and credit unions use to borrow money. They are popular because they pay higher interest than regular savings and are insured by the FDIC. You receive a guaranteed rate of interest for a stated period of time--called the maturity--in exchange for agreeing to leave your money on deposit. There is a hefty fee for removing the money before the time period is completed. There are two ways to calculate earnings on a CD. Which you use depends on whether you decide to have earnings sent to you quarterly or have them deposited in the CD account to earn more interest until the CD matures.
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Instructions
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1
Calculate simple interest for the CD if you choose to have earnings sent to you on a quarterly basis. Quarterly payments are what most banks do. Multiply the annual interest rate by the amount of the CD. For example, if the CD is for $10,000 and the interest rate is 4.80 percent, the annual interest is $480. You would get one-fourth of this, or $120, every three months.
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2
Calculate compound interest if you leave the earnings in the CD until it matures. Ask your banker how often interest is compounded, or calculated, and added to your account. For most CDs this is monthly. Find the monthly interest rate by dividing the annual rate by 12. If the annual rate is 4.80 percent, then the monthly rate is 4.80 percent divided by 12, or 0.40 percent.
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3
Find the monthly earnings on a CD. Multiply the amount of the CD by the monthly interest rate. For the previous example (Steps 1 and 2), this is 0.40 percent times $10,000 or $40. Add this amount to get your new balance ($10,040).
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4
Take the ending balance in the CD and repeat the interest computation for the next month. Then use the ending balance for the second month as your starting point for the third month, and so on. If we use the ending balance and interest rate from Step 3, then the calculation for the second month will be 0.40 percent of $10,040, which is 40.16. Adding this to the CD gives a final balance for the second month of $10,080.16, which you use as the starting point for month 3. Continue this until you've completed 12 months. The total amount over $10,000 is the interest earned on the CD for one year.
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Tips & Warnings
In practice it is tedious to calculate earnings on a CD, so most people use a compound interest calculator. There is a link to a free compound interest calculator under Resources, below.
