How to Calculate The Yield of a Certificate of Deposit


Certificates of deposit are accounts offered by banks and other financial institutions. A certificate of deposit requires you to put the money into the account and not withdraw it for a specified period of time. In exchange for promising to keep it in the account, the bank will pay a slightly higher rate of interest than it would for ordinary savings accounts. They are FDIC-insured for up to $250,000 per person per bank, so they are a very safe investment. However, they will not pay interest rates that are high enough to match the returns of riskier investments like stocks and bonds. To calculate the amount of money the account will yield at maturity, you need to know the interest rate, term, how often the money is compounded and the amount put into the account.

Determine the amount of money you have put into the certificate of deposit.

Determine the amount of time until the certificate of deposit matures. Most certificates of deposit have maturities of less than five years, but some can have a term of 10 years or more.

Determine the interest rate you will earn on your certificate of deposit. The longer the term of your certificate of deposit, the higher the interest rate you will usually get.

Determine how often interest is compounded on the certificate of deposit. Most certificates of deposit are compounded monthly, or 12 times per year.

Calculate the yield of a certificate of deposit by using the following formula, where D is the amount you deposited into the account, R is the interest rate, C is the number of times per year the interest is compounded and Y is the number of years until the certificate of deposit matures:

Yield = D(1+R/C)^(Y*C)-D

For example, if you invested $7,000 in a certificate of deposit that had a 4 percent interest rate, was compounded monthly and matured in three years, you would earn $890.90 in interest by the time the certificate of deposit matured.

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