How to Calculate a CD Rate

Calculating the CD rate shows an investor what he will actually earn on his investment.

A certificate of deposit (CD) is a savings instrument that offers an investor a higher interest rate in exchange for a promise to keep his CD deposit at the bank for a specific amount of time. While the bank gives an interest rate, such as 8 percent a year, this is not the actual interest the CD will earn. The CD will actually earn more interest due to compounding. Compounding is when the bank pays interest on the interest earned. By factoring in compounding, the investor finds the CD's actual rate.

Instructions

1. Determine the interest rate earned on the CD and the number of times the CD compounds. For example, an investor has a CD that earns 9 percent interest and compounds monthly. The CD matures in one year.

2. Divide the interest rate by the number of times the CD compounds. In our example, 9 percent divided by 12 equals 0.0075.

3. Add one to the number calculated in Step 2 then raise the sum to the power of the number of times the CD compounds. In our example, 1 plus 0.0075 equals 1.0075, then 1.0075 raised to the power of 12 equals 1.093806898.

4. Subtract 1 from the number calculated in Step 3. In our example, 1.093806898 minus 1 equals 0.0938 or a CD rate of 9.38 percent.

References

• Investopedia: Certificate of Deposit
• University of Arizona: Compound Interest and APY Calculations