1. What is CD Compound Interest?

A Certificate of Deposit (CD) is a savings account that earns interest at a fixed rate for a fixed term. Compound interest means you earn interest on both your principal and previously earned interest.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

Where:

• \( FV \) — Future value of the investment
• \( PV \) — Principal 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 (daily, monthly, quarterly, etc.) and how that affects your total returns.

3. Importance of CD Returns Calculation

Details: Calculating potential CD returns helps compare different CD offerings, understand the power of compounding, and make informed savings decisions.

4. Using the Calculator

Tips: Enter principal amount in dollars, annual rate as decimal (5% = 0.05), compounding frequency (12 for monthly), and time in years (can use fractions like 0.5 for 6 months).

5. Frequently Asked Questions (FAQ)

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

Q2: How does compounding frequency affect returns?
A: More frequent compounding (daily vs. annually) results in higher returns due to interest earning interest more often.

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

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

Q5: Are CD interest payments taxable?
A: Yes, interest earned on CDs is generally taxable as ordinary income in the year it's earned.