How to Calculate the APY for a CD
Annual percentage yield (APY) is the amount of interest earned on a certificate of deposit (CD) in a year. By computing the APY, you can compare the interest offered by different CDs of different terms on an "apples to apples" basis and then determine which is the best choice for you.
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Instructions
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Calculate APY on CDs
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1
Locate potential CDs for investment. Search on the Internet for CDs according to the length of time you desire to hold them. List them with their annual percentage rate (APR) and, if available, their APY.
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2
Determine the frequency of compounding for the CDs. If the CDs do not list an APY, determine how many times per year the accounts compound interest.
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3
Compute the APY on each CD. APY equals (1 + r/n )n -- 1 where "r" is the stated annual interest rate and "n" is the number of times interest is compounded each year.
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4
If you do not want to compute the APY yourself, there are several websites that feature calculators; see Resources for more info on Web calculators.
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5
Compare the APYs of the CDs. With the identified CDs that have the same length of term, determine which CD offers the highest APY and, therefore, the highest interest benefit.
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Tips & Warnings
CDs are generally protected by the FDIC (Federal Deposit Insurance Corporation), but there are limits on the amount protected in the account. The limit is $250,000 per account holder per bank through December 31, 2009. Absent a change in legislation, the level of insurance drops to $100,000 after that.
