Interest rates on CD accounts are paid daily, weekly, monthly, quarterly, semiannually, or annually, depending on the terms of the financial document. Maturity terms on CDs can vary from one month to 10 or more years, with six-month and one-year maturities on CDs being common. Generally, the longer the term to maturity, the higher the interest rates offered. A typical deposit certificate may mature in one year with interest paid twice, that is semiannually, or a nine-month CD may pay interest three times, once every three months. It varies widely.
How often interest rates are paid on a certificate of deposit (CD) account depends solely on the terms of the particular account. Banks offer a variety of CD accounts with different maturity dates, interest rates, and frequency of interest payments. How often interest rates are paid on the account can produce a significant divergence in interest earned over the life of a CD, especially if the interest is added to the balance and until maturity. When the interest bears interest the investor benefits from the power of compounding.
According to the U.S. Securities and Exchange Commission (SEC), investors should receive a disclosure document on a certificate of deposit detailing the terms. The terms should specify whether the interest rate will be fixed or variable, what the rate will be, and how often interest will be paid. Variable rate CDs may have a step-up or step-down schedule, meaning the rate will gradually increase or decline over time at set intervals.
The more frequently interest is paid on a CD account, the greater the total value at maturity if the interest is added to the balance. To illustrate using numbers easily calculated, suppose a bank offers a 10-year certificate of deposit with a 10 percent annual percentage rate (APR) and interest paid monthly. Suppose a competitor offers a CD that matures in 10 years, with a 10 percent APR and interest is paid annually. The difference in interest earned on $10,000 between the two examples would be $1,132.99 more on the account that pays interest monthly. Although both CDs earn the same APR, the yield increases proportionately with an increased frequency in interest payments.
Zero-coupon CDs pay no interest until the deposit matures. Similar to zero-coupon bonds, the investor can purchase a zero-coupon CD at a significant discount below face value. No interest payments are made. However, when the CD matures, the investor receives full face value. The interest earnings materialize as added face value at maturity.
Certificates of deposit issued by banks are attractive to investors because of the safety and earnings. Most are insured through the Federal Deposit Insurance Corporation (FDIC) up to the current balance limits of the insurance. Because interest rates are generally higher than passbook savings accounts and interest-bearing checking accounts, CDs earn more income on cash accounts that can be easily accessed.