How do I Calculate the Interest Made on a CD?
Certificates of deposit, CDs for short, provide consumers with a fixed interest rate investment that locks their money into the account for a specified period of time, from as little as a week to a decade or more. The longer you agree to keep your money in the account and the more you put in, the higher your interest rate. The interest made on a CD depends on how often the interest is compounded, how much you put in the CD, the interest rate and the term of the CD.
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Instructions
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Figure the periodic interest rate on your CD by dividing the annual interest rate by the number of times per year the interest compounds. For example, if your CD compounds interest semi-annually and pays an annual rate of 4 percent, you would divide 4 by 2 to get 2 percent.
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2
Convert your periodic interest rate to a decimal by dividing by 100. In this example, you would divide 2 by 100 to get 0.02.
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3
Find the number of times interest will be compounded over the life of your CD by multiplying the CD's term in years by the number of times per year interest compounds. Continuing the example, if you have a 2.5 year CD, you would multiply 2.5 by 2 to find that interest would compound five times.
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4
Add 1 to the periodic interest rate. In this example, you would add 1 to 0.02 to get 1.02.
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5
Compute the result from step 4 raised to the power of the result from step 3 using a calculator. In the example above, you would raise 1.02 to the fifth power to get 1.104080803.
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Subtract 1 from the result from step 5 to find the total interest rate expressed as a decimal. In this example, you would subtract 1 from 1.104080803 to get 0.104080803.
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Multiply the amount of money deposited in the CD by the result from step 6 to compute your total interest made on the CD. Finishing the example, if you deposited $8,000, you would multiply $8,000 by 0.104080803 to find that the CD would earn $832.65.
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References
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