Understanding CD (Certificate of Deposit) Interest

A Certificate of Deposit (CD) is a low-risk savings tool that can boost the amount you earn in interest while keeping your money invested in a relatively safe way. Unlike a standard savings account, a CD requires you to leave your money in the bank for a set period of time, known as the term length.

How is CD Interest Calculated?

CD interest is typically calculated using the compound interest formula: A = P(1 + r/n)^(nt).
Where: P is the principal amount, r is the annual interest rate, n is the number of times interest is compounded per year, and t is the time in years.

Key Terms Explained

• Principal: The initial amount of money you deposit.
• APY (Annual Percentage Yield): The real rate of return earned on a savings deposit or investment taking into account the effect of compounding interest.
• Compounding: The process where interest is credited to an existing principal amount as well as to interest already paid. Daily compounding yields more than monthly or annual compounding.

Tax Considerations

Interest earned on CDs is generally considered taxable income by the IRS. This calculator allows you to input your estimated tax rate to see your "After-Tax" earnings, giving you a realistic picture of your investment growth.