How to Calculate CD Interest Earned
CDs (certificates of deposit) are popular with investors because they provide a guaranteed rate of interest for a specified time called the maturity. Also, CDs are very safe since they are insured by the FDIC like other bank deposits. If you need to calculate CD interest earned for any length of time up to the maturity of the CD, it's a straightforward process. Some CDs distribute (pay out) interest earnings each quarter and you'll use a slightly different procedure than for CDs in which interest is added to the balance.
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Instructions
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Find out the information necessary to calculate CD interest earnings. You'll need the amount of the CD and its base interest rate (not the effective or compound interest rate). The base rate is also called the simple interest rate. You also need to know how often the CD is compounded (interest calculated and added to the balance) and whether accrued interest is paid out quarterly.
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2
Figure the periodic interest rate. The periodic interest rate is the percentage interest earned during each compounding interval. To calculate the periodic interest rate, divide the base rate by the number of intervals in one year. For example, if a CD pays an annual rate of 4.8 percent and is compounded monthly, divide 4.8 percent by 12 to get the periodic rate (0.4 percent).
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Multiply the periodic interest rate by the balance in the CD to find the interest earned in one compounding interval. For instance, if you have a $10,000 CD with interest compounded monthly and the periodic rate is 0.4 percent/month the interest for one month is 0.4 percent of $10,000 or $40. Add the interest earned to the $10,000 to find the new balance.
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Repeat Step 3 as many times as you need to calculate CD interest earned for any length of time, taking the total from the previous calculation as your starting balance for the next.
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Enter a formula to calculate CD interest earnings into a programmable calculator. Steps 2 and 3 describe the process but are time-consuming. The formula is P times (1 + r)^n) -- P = E. P is the starting value of the CD, r is the periodic rate and n is the number of time intervals ("^" means n is an exponent). E is the total interest earned.
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Calculate CD interest earned when interest is paid out quarterly. To do this, calculate the interest rate as described above for one quarter. Since the interest earnings are paid out, your CD balance returns to its initial value and the earnings will be the same for each quarter. To figure total interest earned for more than one quarter, multiply the amount earned in one quarter by the number of quarters.
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Tips & Warnings
It's a good idea to understand how CD interest earnings are calculated by your bank or credit union. In practice, the easiest way to figure CD interest is to use an interest calculator tool. Many good ones are available online for free.
