A certificate of deposit (CD) is a product provided by financial institutions such as banks and credit unions. They're similar to savings accounts except that CDs are only held for a fixed period of time. This period of time is known as the term of the CD. A CD usually has a fixed interest rate and is intended to be held until the term is reached. The principle may then be withdrawn, along with the accrued interest.
Step 1
Calculate the interest on the CD with the formula I = P * (1 + r / n)^(t * n) - P. I is the accrued interest of the CD, P is the principle of the CD, r is the annual interest rate expressed as a decimal fraction, n is the number of compounding periods in a year and t is the term of the CD in years.
Step 2
Select the annual interest rate. Financial institutions generally provide the interest that a CD will accrue in one year. Ensure that the advertised rate on a CD is its annual rate.
Step 3
Express the annual interest rate of the CD as a decimal fraction. A financial institution typically provides the annual interest rate on a CD as a percentage of its principle. You can convert a percentage interest rate to a decimal fraction by dividing the percentage by 100. For example, an interest rate of 7 percent is equal to a decimal fraction of 7/100, or 0.07.
Step 4
Determine the number of times that the interest on the CD is compounded. Financial institutions generally compound the interest rate on a CD once per month.
Step 5
Perform an example of the interest calculation for a CD. The CD has a $10,000 principle, a 7 percent interest rate, a monthly compounding period and a 5 year term. The accrued interest is given by I = P * (1 + r / n)^(t * n) -- P = 10,000 * (1 + 0.07/12)^(5 * 12) -- 10,000 = $4,176.25.
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