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CD Return Formula:
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The CD (Certificate of Deposit) Return Formula calculates the interest earned on a CD investment over a specified term. It accounts for compound interest, which means you earn interest on both your principal and previously earned interest.
The calculator uses the CD return formula:
Where:
Explanation: The formula calculates compound interest by raising the growth factor (1 + rate) to the power of the number of years, then subtracts the original principal to show just the earned interest.
Details: Calculating CD returns helps investors compare different CD offerings, understand their potential earnings, and make informed decisions about where to place their money for guaranteed returns.
Tips: Enter the principal amount in dollars, annual interest rate as a percentage (e.g., 2.5 for 2.5%), and the term in years. Partial years (like 1.5 for 18 months) are acceptable.
Q1: Does this calculator account for monthly compounding?
A: This version assumes annual compounding. For monthly compounding, the formula would need adjustment to divide the rate and multiply the periods by 12.
Q2: Are CD returns taxable?
A: Yes, interest earned on CDs is typically taxable as ordinary income in the year it's earned, unless the CD is in a tax-advantaged account.
Q3: What's the difference between APY and APR in CDs?
A: APY (Annual Percentage Yield) includes compounding effects, while APR (Annual Percentage Rate) doesn't. This calculator uses APR for its calculations.
Q4: Do all CDs use compound interest?
A: Most do, but some may offer simple interest. Always check the terms of your specific CD.
Q5: What happens if I withdraw early?
A: Early withdrawals typically incur penalties that would reduce your actual return. This calculator assumes you hold the CD to maturity.