CD Rate Calculator

A CD (certificate of deposit) is one of the simplest transactions in banking. You place a certain amount of money and agree not to withdraw it for a set period of time. During that time, the bank pays you a fixed interest rate.

The great advantage of CDs is their fixed interest rate. While the interest on checking accounts can be reduced at any time, with a CD you know from day one how much money you will get at the end of the term. This calculator determines that amount and also takes into account factors such as taxes, penalties for early withdrawal, differences in competing rates, and whether or not the return actually exceeds inflation - aspects that many CD calculators do not consider.

How the CD calculator works:

Most results are based on three inputs: investment amount, length of time and annual percentage yield (APY).

APY is short for Annual Percentage Yield and a figure published by the bank. It's the most reliable measure when comparing accounts as it already factors in the effects of compound interest. The APY allows you to calculate your final amount with a simple calculation.

P is the principal amount invested, APY is the interest rate as a decimal and t is the term in years. For a CD with a maturity of 12 months, t would be equal to 1; for a CD with a maturity of 18 months, t would be equal to 1.5.

Suppose you invest $10,000 into a three-year certificate of deposit (CD) with an annual percentage yield (APY) of 4.00%:

The final amount of this investment at maturity is thus $11,248.64, with the interest being the difference:

How is the annual percentage yield (APY) calculated?

Banks often offer two different interest rates which can be confusing for savers. The stated rate is also known as the nominal interest rate and it's a figure that stands out before compounding has been calculated. The annual percentage yield (APY), on the other hand, is the actual return you'll get once the bank starts charging interest on your earned interest earnings.

The two rates are linked by how often interest is compounded.

In this formula, r represents the stated interest rate and n is the number of compounding periods per year that the bank uses. Most money market accounts compound daily, so n will be approximately 365.

This calculator allows you to calculate the formula forward by leaving the APY field blank and entering a posted rate. If you enter an APY and leave the Posted Rate field blank, it will solve the same equation in reverse showing what nominal interest rate is required to achieve that effective annual yield.

With a published interest rate of 4.00%, yields are as follows, depending on the compounding frequency:

The difference narrows quickly. Switching from annual to monthly compounding increases the return by about seven basis points, and switching from monthly to daily adds less than a basis point. People who tout daily-compounding savings are really selling rounding error.

Actual costs over time

At a deposit amount of $10,000 and an APY of 4.00%, these are as follows:

Please note: The interest does not increase linearly. Five years of interest is more than five times one year's interest because the annual interest is added to the balance and earns interest itself.

Compare interest rates: What is a basis point?

This is where a CD calculator tool comes into play. Even if the interest rates offered by two banks appear similar, the difference can be significant in dollar amounts.

If you invest $10,000 in a CD with a three-year term and an annual percentage yield (APY) of 4.00%, at the end you will have $11,248.64. If you invested that same amount at an interest rate of 3.00%, at the end you would have $10,927.27. That one percentage point difference alone results in a $321.37 difference in interest earned, and all it takes is filling out an additional form. That's real money.

When you open the comparison panel, the calculator tool will do this calculation for you and show you the APY of other banks next to your own so that you can see the difference right away.

How taxes turn high interest rates to normal ones

In the United States, interest income from CDs is generally considered to be ordinary income. The bank will send a Form 1099-INT and taxes are paid in the year that the interest is credited, not the year the CD matures. The only exception is if the CD is held in a tax-deferred account such as an IRA.

This leads to a significant change in the actual returns which are often much higher than many savers expect. For example, take a three-year fixed deposit with an annual percentage yield (APY) of 4.00% and a $10,000 investment. The investor is then in the 24% tax bracket:

The attractive 4.00% return reduces to about 3.07% after taxes are deducted. When comparing money market accounts with government bond funds or I-bonds, you should consider the after-tax return rather than the advertised APY.

Early termination of current accounts

There are fees for any early termination of a day account which is usually not stated as a fixed amount but rather as a certain monthly interest rate. For short-term day accounts it's often three months, six months for medium-term and more than one year for five-year accounts.

The fee is not charged on the actual interest earned but rather on the amount disbursed. This distinction is important:

Consider a money market account with $10,000, an APY of 4.00%, and a six-month fee for closing the account at $200. Regardless of when the account is closed, that's a $200 charge. If the account is closed after one year, this money market account will have grown to $10,400, so you would keep $10,200, which still represents a gain.

However, the amount you withdraw after six months is only $10,198.04. Subtracting the same $200 penalty leaves you with just $9,998.04, which is less than your original deposit. This corresponds to a situation where the prospectus indicates that capital can be eroded by penalties.

The calculator will show you this break-even point and allow you to determine exactly how long you need to hold the bond in order not to lose money if you sell early.

Can interest rates outpace inflation?

Only if the rate of price increase is below this will the guaranteed 4.00% be a real gain. The actual value of the final capital is:

At a rate of inflation of 3% and over three years the final value of this $11,248.64 is worth $10,294.10 in today's money - still a gain but at a growth rate of just 2.9% rather than 12.5%.

When you open the inflation adjustment field, the calculator will translate the results into current purchasing power and clearly show when the rate of return no longer exceeds inflation.

CD ladders and other ways to free up tied-up capital:

The biggest disadvantage of long-term investments is that the capital becomes tied up. A CD ladder is a common solution to this. Instead of buying one five-year CD, five smaller CDs are purchased with maturities spaced out by one year each.

Because a portion of the investment matures each year, part of the principal can be used regularly without penalty. In addition, if necessary, the maturing portions can be reinvested in new long-term CDs at current rates. Each individual section can be calculated separately with this calculator and when you add up the amounts due at maturity, you will have the total return on your entire ladder.

Other options offer flexibility at the expense of returns.

• CDs without penalties allow for a penalty-free early withdrawal but have a lower interest rate.

• Step-up CDs have an interest rate that is increased once during the term to a higher published rate.

• Callable CDs offer a higher rate of interest but the bank can call the CD early if rates fall.

• Broker CDs are purchased through a broker and can also be sold on the secondary market. The price varies depending on the interest rate.

Prerequisites for calculation tools.

• At the beginning a one-time amount is deposited and then no further deposits are made. This applies to most fixed-term investments.

• The annual percentage yield (APY) is constant throughout the term.

• The interest is not paid out monthly but stays on the fixed deposit account and accrues interest.

• Taxes are not deducted directly from the CD account but paid with other funds so the tax field does not show the amount after deducting the principal for interest, it shows what is actually left.

If the bank pays interest monthly instead of compounding it on a fixed deposit account to a current account, then the balance in the account will not increase through compound interest. The interest received is then only simple interest and therefore lower.

This calculator is for general educational and planning purposes only and does not constitute financial advice. Published rates are constantly changing, the way banks round interest can vary, and early closure terms differ from institution to institution. Please read your statement before making a deposit.