How to Calculate the Interest Earned on a 6 Month CD

Banks offer CDs with varying terms.

A CD, or certificate of deposit, is a deposit account that requires the customer to leave the money in the account for a specified period of time. The bank typically pays a higher interest rate on the money than other accounts because of the guarantee that the bank will have the money for a certain period of time. In order to calculate the interest earned on a six-month CD, you need to know how much was put into the CD and how often interest is compounded.

Things You'll Need

• Calculator

Instructions

1. Ask your financial institution whether interest is compounded on a monthly basis or only once over the term of the CD. If it is monthly, skip to step 4.

2. Divide the annual interest rate by 2 to find the semi-annual interest rate. For example, if the annual interest rate is 4.5 percent, you would divide by 2 to get 2.25 percent, or 0.0225.

3. Multiply the amount of month you put into the CD by the semi-annual interest rate to calculate the interest you would earn on the CD if interest were only compounded once over the life of the CD. In the example, if you put in $500, you would multiply $500 by 0.0225 to find you would earn $11.25 in interest.

4. Divide the annual interest rate by 12 if interest is compounded monthly to calculate the monthly interest rate. Using the same interest rate as the prior example, you would divide 4.5 percent by 12 to get 0.375 percent, or 0.00375.

5. Add 1 to the monthly interest rate. Continuing the example, you would add 1 to 0.00375 to get 1.00375.

6. Raise the result from Step 5 to the sixth power because when interest is compounded monthly for six months, the CD has six compounding periods. In this example, you would raise 1.00375 to the sixth power to get 1.022711995.

7. Multiply the result from Step 6 times the amount of money you put into the CD to find the value of the CD at the end of the six-month term. In this example, you would multiply 1.022711995 by $500 to get $511.36.

8. Subtract the original value of the CD from the value of the CD at maturity to determine how much interest you earned. Finishing this example, you would subtract $500 from $511.36 to find that you earned $11.36 in interest.

References

• SEC: High-Yield CDs -- Protect Your Money by Checking the Fine Print
• DePaul: Compound Interest Formula