Interest is the fee paid on a borrowed asset. This includes the money earned by the funds in a certificate of deposit (CD). A CD is purchased for a fixed period of time that's known as its term. It typically pays a fixed interest rate set by the financial institution. You can calculate the interest on a CD if you know the initial balance, interest rate and the term of the CD.
Step 1
Determine the annual interest rate. Financial institutions generally provide the interest rate for a year. However, check with the financial institution to ensure that the interest rate provided for the CD is its annual rate.
Step 2
Convert the interest rate on the CD to a decimal fraction. A financial institution typically provides the interest rate on a CD as a percentage of the principle. Divide this percentage by 100 to convert the interest rate to a decimal fraction. For example, an interest rate of 5 percent is equal to an interest rate of 5/100, or 0.05.
Step 3
Determine the type of interest that the CD will accrue. CDs almost always accrue simple interest, meaning that the interest accrues only on the principal and not the interest.
Step 4
Calculate the interest on the CD with the formula I = PRN. I is the total interest, P is the cost (principal) of the CD, R is the annual interest rate as a decimal fraction and N is the term of the CD in years.
Step 5
Determine the interest on a specific CD. Assume that the CD is worth 5,000, has an annual interest rate of 7 percent and a term of 5 years. The interest earned on the CD will be I = PRN - P = $5,000 x 0.07 x 5 = $1,750.
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