How to Calculate CD Growth

Unless you're a professional trader, you invest in certificates of deposit (CDs) for a predictable low-risk return on your money. A CD is a fixed income investment, meaning that your return is fixed for the life of the investment, and you don't have to worry about the value of your future return changing, as with a stock. Your CD will grow predictably, and you can calculate ahead of time how much it will grow over its life.

Instructions

1. Look up the annual percentage yield (APY) for the CD. Don't confuse this with the annual percentage rate (APR). The APR ignores the compounding of interest within a year, and most CDs have monthly or semi-annual compounding. The APY makes the math easy for CDs that are held in increments of years.

2. Calculate the total percentage growth of the CD. Take the APY, add 1 to it, and raise their sum to the power of the number of years of the CD's life. For example, if you have a 3-year CD with an APY of 2 percent, your calculation would be (1+0.02)^3 = (1.02)^3 = 1.061208. This equates to 6.1208 percent.

3. Calculate the CD final amount. Multiply the original amount invested in the CD by the total percentage growth. For example, if the total percentage growth is 6.1208 percent from the step above for a $1,000 CD, the final CD amount is $1,000 * 1.061208 = $1,061.21 (rounded to nearest penny).

4. Calculate absolute CD growth in dollars. Subtract the original amount invested from the final CD amount. For a final CD amount of $1,061.21 with an original investment of $1,000, the absolute CD growth is $61.21.

References

• Investopedia: APR and APY: Why Your Bank Hopes You Can't Tell The Difference
• Investopedia: Fixed Income

Resources

• Bankrate: CD calculator
• Bankaholic: CD Rates