Mastering CD Interest Calculations
Calculating CD interest might seem complex due to compounding, but the formula is straightforward once you know the variables. Whether you want to double-check your bank's statement or forecast your savings, here is everything you need to know.
The Compound Interest Formula
The universal formula for compound interest is:
A = P(1 + r/n)^(nt)
- P = Principal (initial deposit)
- r = Annual interest rate (decimal, e.g., 0.05 for 5%)
- n = Number of times interest compounds per year
- t = Time in years
Real-World Example
Let's say you invest $10,000 in a 1-year CD with 5.00% APY compounding monthly.
- Convert rate: 5% = 0.05
- Determine n: Monthly = 12
- Plug in: 10000 * (1 + 0.05/12)^(12*1)
- Calculate: 10000 * (1.004167)^12 ≈ $10,511.62
Using Excel or Google Sheets
You can calculate the future value of a CD using the FV function:
=FV(rate/n, n*years, 0, -principal)
=FV(0.05/12, 12*1, 0, -10000)