Certificate of Deposit Calculator
Use this calculator to find out how much interest you can earn on a Certificate of Deposit (CD). Just enter a few pieces of information and we will calculate your annual percentage yield (APY) and ending balance. Click on the “View Report” button to see a detailed schedule of your CDs balance and interest earned.
For more information about these these financial calculators please visit: Financial Calculators from KJE Computer Solutions, LLC
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What is the Difference Between APR and APY?
When comparing different types of CDs it’s important to understand the difference between Annual Percentage Return (APR), and Annual Percentage Yield (APY).
APR is the easiest to understand because it’s the rate of interest that an account earns over a twelve month period.
If your CD quotes an APR of 5%, then you will earn $5 for every $100 invested each year.
However, most CD accounts pay out interest multiple times a year, giving you the opportunity to earn “interest on interest”. This is where annual percentage yield (APY) comes into play.
It’s easier to get your head around this concept by looking at a real world example. Let’s say you open an account with $100, that pays an annual percentage rate (APR) of 10%. Therefore after 1 year you’ll have earned $10 as a result of the interest on the account.
That’s fine if your account only pays interest once a year. But depending on your bank, CDs can accrue interest daily, monthly, weekly and even quarterly.
So lets see what happens if your 10% interest is paid at two points throughout the year, 5% after you’ve held the account for 6 months, followed by a further 5% at 12 months.
The first interest payment of 5% for the initial 6 months is easy: Take your $100 and multiply by 5%. You have earned $5 worth of interest for the first 6 months, this brings the total amount in your account to $105.
That’s all pretty straight forward, but the second six months is where it gets interesting.
Einstein’s Rule of 72
Albert Einstein who scientific discoveries include E=MC2 (Squared) is credited with saying, “compound interest is the greatest mathematical discovery of all time.” One less known mathematical formula he developed was the rule of 72.
In its simplest form Einstein explained it this way. When you invest money, you earn interest on your capital. In the next year, you earn interest on your capital and the interest you earned the year before.
By using Einstein’s Rule of 72 you can fairly accurately determine how long it will take to double your money at a given interest rate. The rule is simple, divide the number 72 by the interest rate you are receiving (72/10=7.2), and you will find the number of years it will take to double your money.
The Concept of Compounding
Einstein’s Rule of 72 neatly explains the concept of compounding. Now lets apply it to our example.
In the second six months your interest rate is the same 5%, but this time it’s paid on your new balance of $105 instead of your original balance of $100. To work out our interest for the second six months we must take our $105 x 5% giving us a total of $5.25 interest.
The total amount you have earned for twelve months is $10.25, compared to the $10 you would’ve gotten if the interest was paid once after twelve months. That additional $0.25 paid in the second half of the year is essentially the difference between APR and APY.
I know $0.25 doesn’t seem like a lot, so why worry about the difference. But when you’re talking about thousands of dollars over a five year period. Those $0.25 add up.
In our example, interest was paid semi-annually. To calculate the interest payment, we took the APR and divided it by the number of times that interest was paid per year.
So what if interest is paid 12 times per year? You simply need to divide the rate (10%) by 12 (months) giving you a total of 0.83. Now you need to add 0.83% to the principal each month. And don’t forget to include (compound) the interest.
With many banks now paying interest daily, 365 times per year, working out your APY from your APR has become fairly complicated.
CD Interest Calculator
To help you calculate true APY rates we offer a CD interest calculator. This does all the heavy lifting for you, simply enter the principal amount (the amount you want to invest), the Annual Percentage Rate (APR) and how often interest is paid on the account. Then let our CD calculator do the rest.
The difference between Annual Percentage Return (APR) and Annual Percentage Yield (APY) is that APR does not take into account the compounding of interest. The APY is the rate actually earned or paid in one year, taking into account the effect of compounding.
Why Cashing in a CD Early Can Reduce Returns
Certificates of Deposit (CDs) are considered to be safe investments, because unlike most investments there is little risk to your capital. You’re guaranteed a particular rate of interest for the life of the CD and the principal is insured by the Federal Deposit Insurance Corporation (FDIC).
However, you could lose money if you choose to cash your CD in early. Withdrawing funds from a CD before its duration, will incur withdrawal penalties which could eat into your principal investment. Just how much depends on the terms of your CD.
Less than 12 Months
As a rule, shorter-term CDs have smaller penalties than longer term CDs. Cash-in your
12-month or shorter CD and you’ll usually have to forfeit at least three months of simple interest, but check with your own bank’s policies to be sure.
Some of the larger banks, including Bank of America and Wells Fargo, have chosen to implement an early withdrawal fee of $25 plus 1% of the principal. If the rate on your CD is under 1%, you’ll have lost money on the transaction.
12 Months or More
Penalties for CDs of one to five years typically run to about six months of interest, CDs with terms over five years will cost you nine months of interest on average.
Bank at one of the larger institutions with a percentage policy and you’ll be hit with a whopping 3%, on top of the $25 flat fee. You should contact your bank for their current fees, but be prepared for a shock.
Always Read the Fine Print
So you’ve read your policy document and figured that your bank is going to charge you six-months of interest to withdraw a sum early from your CD.
However, after making the withdrawal you may be disappointed to learn that you were actually charged nine months interest instead of the six you were expecting.
Why? If you’re thinking banks can’t change policies midstream, re-read the terms of your contract.
Most CD contracts allow the bank to change fees or penalties without notice. If you find your bank is trying to charge you more than your contract specifies for early withdrawal. Check the terms of the contract for the phrase “the bank reserves the right to change fees or penalties”. If your contract doesn’t leave that door open, escalate the issue with your bank.
As you can see withdrawing early is never a good idea. Therefore you should only tie-up money in a CD if you’re sure you won’t need access to it for the duration.
Of course emergencies do arise, and if they do you’ll be pleased to know that the Internal Revenue Service is there to support you.
Early withdrawal fees are tax deductible, because they’re a reduction in taxable income, so it’s not a dollar-for-dollar return on your loss. Although that’s unlikely to ease the pain. Your bank will send you a form 1099-INT with the penalty amount in Box 2. Report the penalty on line 30 of Form 1040.
365 Days Vs. 360 Day Yields
In order to properly compare yields on different CDs, it’s important to use the same yield calculation.
When banks determine the daily interest rate from the annual rate, they use either a 365-day year or a 360-day year. These are known as the 365/360 and 365/365 methods respectively.
Bank CDs have historically been quoted on a 360-day year, and institutionally, many still are. However, because the rate is a little higher using a 365-day year, most retail CDs are now quoted using the 365/365 method.
You might be thinking, why would a bank use a 360-day year? This is not a trick, it dates back to a time before computers. (Yes there was finance before computers.) It affords division of the calendar into 12 30-day months, making pre-computer hand calculations easier.
How does this affect you? If the bank is paying out interest using the 360 day method, interest is actually earned for all 365 days but the full amount of interest is earned in just 360 days.
That means the principle and the interest can be invested for an additional five days, giving the investor a higher effective rate of interest.
Using a simple interest rate of 5.05%, the 365/360 method = a daily factor of .014028% compared to a daily factor of .013836% using 365/365.
On a $100,000 one-year CD that compounds daily, that equates to $10517.95 or 5.18% APY using the 365/365 method or $10525.32 or 5.25% APY using the 365/360 method.
To convert a 360-day yield to a 365-day yield, simply “gross up” the 360 day yield by the factor 365/360. A 360-day yield of 8% equates to a 8.11% yield based on a 365-day year.
8% x (365/360) = 8.11%