A Certificate of Deposit (CD) is a savings product offered by banks and credit unions that provides a fixed interest rate for a specified term. Use this calculator to determine how much your CD investment will be worth at maturity.
Formula
The future value of a CD with compound interest is calculated using:
$$FV = P \times \left(1 + \frac{r}{m}\right)^{m \times t}$$
Where:
- FV = Future value at maturity
- P = Principal (initial deposit)
- r = Annual interest rate (as a decimal)
- m = Compounding frequency per year
- t = Number of years
Example Calculation
If you deposit $10,000 in a CD with a 5% annual interest rate, compounded monthly, for 5 years:
$$FV = 10{,}000 \times \left(1 + \frac{0.05}{12}\right)^{12 \times 5}$$
$$FV = 10{,}000 \times (1.004167)^{60}$$
$$FV = 10{,}000 \times 1.2834$$
$$FV = 12{,}834$$
Your CD would be worth approximately $12,834 at maturity, earning $2,834 in interest.
Compounding Frequency Explained
The more frequently interest compounds, the more you earn:
- Annually (1x): Interest calculated once per year
- Semi-annually (2x): Interest calculated twice per year
- Quarterly (4x): Interest calculated four times per year
- Monthly (12x): Interest calculated twelve times per year
- Daily (365x): Interest calculated every day
Higher compounding frequency results in slightly higher returns due to the effect of compound interest.
Benefits of CDs
- Guaranteed returns: Fixed interest rate locked in for the term
- FDIC insured: Deposits up to $250,000 are protected
- Higher rates: Typically offer better rates than regular savings accounts
- Predictable: Know exactly how much you will earn at maturity
Considerations
- Early withdrawal penalties: Cashing out before maturity typically incurs a penalty
- Interest rate risk: If rates rise, you are locked into a lower rate
- Inflation risk: Returns may not keep pace with inflation
- Liquidity: Funds are not easily accessible during the term