1. What is Compound Interest?

Compound interest is interest calculated on the initial principal and also on the accumulated interest of previous periods. For CDs (Certificates of Deposit), this means your interest earns interest over time, leading to exponential growth of your investment.

2. How the Calculator Works

The calculator uses the compound interest formula:

Where:

• \( principal \) — Initial investment amount
• \( r \) — Annual interest rate (in decimal)
• \( n \) — Number of compounding periods per year
• \( t \) — Time the money is invested for (in years)

Explanation: The formula accounts for how often interest is compounded, with more frequent compounding leading to higher returns.

3. Importance of Compounding Frequency

Details: The more frequently interest is compounded, the greater the return. Daily compounding yields slightly more than monthly, which yields more than quarterly, and so on.

4. Using the Calculator

Tips: Enter the principal amount, annual interest rate (as a percentage), term length in years (can use decimals for partial years), and select how often interest is compounded.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between simple and compound interest?
A: Simple interest is calculated only on the principal amount, while compound interest is calculated on the principal plus accumulated interest.

Q2: How does term length affect CD returns?
A: Longer terms generally yield higher returns because interest has more time to compound.

Q3: Are CD returns guaranteed?
A: Yes, CDs typically offer fixed interest rates, so your return is predictable if held to maturity.

Q4: What happens if I withdraw early?
A: Most CDs charge an early withdrawal penalty, which would reduce your effective return.

Q5: How are CD interest payments taxed?
A: Interest is typically taxable as ordinary income in the year it's earned, unless in a tax-advantaged account.