How to Figure Interest Rates on a CD

A CD is a certificate of deposit with a banking institution such as a commercial bank or credit union. CDs, like all banking products, are insured by the FDIC or NCUA up to a certain maximum. CDs earn a pre-set rate of interest that is computed via a simple interest calculation.

Things You'll Need

• Calculator

Instructions

Simple interest calculation for CDs

1. Write out the simple interest formula:

   Interest = Principal x Rate x Time
   -or-
   I = PRT

2. Fill in the terms:

   Principal is the amount you will deposit into the CD.
   Rate is the interest rate the bank is pay in decimal form (5% is .05).
   Time is the amount of time the CD is set for in years (one year = 1, 6 months = .5)

3. Multiply and to get the answer for how much interest you will earn.

   Example:

   P = 1,000
   R = 5%
   T = 10 years
   I = PRT
   1,000 x .05 x 10 = 500

   After 10 years, $1,000 deposited in a CD will earn $500 of interest, for an ending account value of $1,500.

Tips & Warnings

• All interest earned on CDs is taxable the year that it is earned.

References

• wikipedia article on CDs