How to Figure CD Rates
CDs, or certificates of deposit, are a bank-issued savings product that pays interest. CDs are time deposits, which means that you must leave your money in the CD for a specified amount of time, typically three months to five years. CDs pay savers a specified rate of interest, which can be expressed either as an annual percentage rate (APR) or an annual percentage yield (APY). Understanding how both APR and APY are calculated and differences between them will help you figure CD rates.
Other People Are Reading
Instructions
-
-
1
Determine if the bank is promoting its CDs with the rates quoted as APR or APY. If you are looking at an advertisement, it will say one or the other; if you're talking with a banker in person, ask which method they are quoting you.
-
2
Jump to Step 3 if the loan is calculated with APR (and it seldom is). If the loan is calculated with APY, ask how often the interest on the loan compounds. Typical answers to this question will be quarterly, monthly or daily.
-
-
3
Plug the data into an interest calculator such as the one from bankrate.com (see Resources). Enter your interest rate and amount you will deposit. Select "annual" if the interest is expressed as an APR; if the interest is expressed as an APY, enter the appropriate compounding time frame.
-
1
Tips & Warnings
APR is a nominal expression of an annual interest rate. APY takes into account the effect of periodic compounding.
Don't commit to locking your money into a CD unless you're positive you can wait until the CD has matured. Withdrawing money from a CD before maturity means you pay a penalty that can sometimes be as much as the interest you earned on the CD.
References
Resources
- Photo Credit money, money, money image by easaab from Fotolia.com
