How Can I Calculate the Interest to Be Paid on a CD?
CD is an abbreviation for certificate of deposit. A CD is a deposit account offered by many financial institutions that requires the money to be left in the account for a set term. In return, the bank pays you a higher rate of interest than you would get on a savings account or checking account. To calculate the interest on the CD, you need to know the interest rate, the compounding periods, the term and how much you are putting in the CD.
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Instructions
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Check your CD terms to find out how often interest will be compounded on your CD. You can also contact the bank to find this information. Some CDs may compound interest monthly, while others may compound interest annual.
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Divide the annual interest rate on the CD by the number of times per year the interest is compounded. For example, if your CD pays an annual rate of 5.7 percent and your interest compounds semi-annually, you would divide 4.6 by 2 to find your periodic interest rate equals 2.3 percent, or 0.023.
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Add 1 to the interest rate expressed as a decimal. In this example, you would add 1 to 0.023 to get 1.023.
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Determine the number of compounding periods over the term of the CD by multiplying the term of the CD in years by the number of compounding periods per year. For example, if you had an 18 month CD (1.5 years) that compounds semiannually, you would multiply 1.5 by 2 to get 3.
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Raise the result from step 3 to the power of the result from step 4. In this example, you would raise 1.023 to the third power to get 1.070599167.
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Multiply the result from step 5 by the principal of the CD to find the final value of the CD. Continuing the example, if you put $300 in a CD, you would multiply $300 by 1.070599167 to find the final value of the CD would be $321.18.
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Subtract the starting amount of the CD from the final value to find the amount of interest earned. Finishing the example, you would subtract $300 from $321.18 to find $21.18 would be paid in interest.
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References
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