Calculating CD Interest Rates

I am really not very good at mathematics. Numbers baffle me in a way that taking a look at them makes me dizzy. But then I came upon some additional money and I determined to invest it in a CD account at my bank. Naturally, I marvelled how much it will earn in charges. So I asked the bank’s representative to enlighten me on the problem.

She told me that there are 4 basic factors in working out CD bank rates. One factor is the Principal which is basically the quantity of cash 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 third factor is the Term or the number of months the money is left with the bank. I determined to deposit it for 6 months. The last factor is the Compounding Frequency. My bank offers a once per month compounded interest. Essentially this is the usual 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 six months I get a total of $1015.

By the way, there are 2 ways that CD bank rates are figured out. If you want to get monthly interest on your CD deposit, the bank will use the annual percentage rate (APR) to calculate the predicted earnings of your money. If on the other hand you need the interest compounded till your CD account’s maturity, the annual percentage yield (APY) is utilized.

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

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Calculating CD Interest Rates

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