CD Interest Rates – How To Calculate Them

I’m really not very good at arithmetic. Numbers baffle me in a way that looking at them makes me dizzy. But then I came upon some extra money and I chose to invest it in a CD account at my bank. Naturally, I wondered how much it’ll earn in fees. So I asked the bank’s representative to enlighten me on the problem.

She told me that there are 4 basic factors in figuring out CD bank rates. One factor is the Principal which is actually the amount of money that you deposit in the account. In my case, it is $1000. Another factor is the Interest Rate being offered by the bank. Now my bank offers three percent per annum for a deposit of $1000. The 3rd factor is the Term or the quantity of months that the money is left with the bank. I decided to deposit it for six months. The last factor is the Compounding Frequency. My bank offers a once per month compounded interest. Essentially this is the common compounding frequency that banks apply to CD accounts. You get the best CD rates if the interest is compounded more often.

So let me illustrate the computation on my $1000 deposit:

Principal = $1000
Rate = 3% per annum
Term = 6 months
Compounding Frequency = monthly

Interest = Principal x Rate / 1 year x 6 months
= $1000 x .03 / 12 x 6
= $15

So at the end of 6 months I am getting a total of $1015.

By the way, there are two ways that CD bank rates are calculated. If you want to get monthly interest on your CD deposit, the bank will use the annual percentage rate (APR) to work out the expected earnings of your money. If on the other hand you would like the interest compounded until your CD account’s maturity, the annual percentage yield (APY) is used.

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Since the rate and the terms are O.K with me, I opened the CD account at my bank. Though I’m of the opinion that CD rates change among banks, I am confident in my bank’s stability.