How to Calculate the Return of Certificates of Deposits
Certificates of deposit provide investors with a conservative investment based on a guaranteed rate of return for a set period. When calculating the return on a CD, you need to know your initial purchase price, the interest rate and the CD's number of compounding periods. With this information, calculating your return on the CD is a simple procedure.
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Instructions
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1
Determine the interest rate you will be receiving on your CD on an annual basis, and convert the amount to a decimal format. For example, if the rate is 5 percent, divide 5 by 100, which results in .05.
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2
Divide your result by the number of compounding periods per year. A compounding period is a time frame that ends with interest added to your CD's balance. For instance, quarterly compounding occurs four times a year. When quarterly compounding is used for this example, the calculation would be .05 divided by 4, which is .0125.
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3
Add 1 to your result from Step 3. In this example, the calculation would be 1 plus .0125, which equals 1.0125.
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4
Next, you'll multiply the result you calculated in Step 3 by itself several times. This number of times equals the CD's number of years before maturity divided by the number of compounding periods per year. In this example, the CD matures in 20 years, and there are four compounding periods per year. So the calculation is 20 divided by 4, which equals 5. This means 1.0125 gets multiplied by itself five times, which results in 1.064.
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5
Multiply your result from Step 4 by the initial amount invested in the CD. In this example, the amount invested was $1,000. The calculation is 1.064 times 1,000, which equals $1,064. So the total value of the CD after 20 years is the original $1,000 you invested plus the $1,064 you earned. Your return on the CD is $1,064: $2,064 minus the $1,000.
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Tips & Warnings
When doing these calculations, use a calculator to avoid making the mistakes that can result from doing math by hand.
Be sure to verify the number of compounding periods per year for your CD, as it can make a significant difference in the return, especially when you're comparing it to similar CDs' returns.
