1. What is Daily Compounding Interest?

Daily compounding interest means that interest is calculated on your principal plus any accumulated interest every day. This results in slightly higher returns compared to simple interest or less frequent compounding periods.

2. How Does the Calculator Work?

The calculator uses the daily compounding interest formula:

Where:

• \( P \) — Principal amount ($)
• \( r \) — Annual interest rate (as decimal)
• 365 — Number of compounding periods per year
• 1 — Number of years

Explanation: The formula accounts for the effect of compounding interest daily over a one-year period.

3. Importance of Accurate Interest Calculation

Details: Understanding how much interest your CD will earn helps with financial planning and comparing different investment options.

4. Using the Calculator

Tips: Enter the principal amount in dollars and the annual interest rate as a decimal (e.g., 5% = 0.05). All values must be valid (principal > 0, rate > 0).

5. Frequently Asked Questions (FAQ)

Q1: How does daily compounding compare to monthly compounding?
A: Daily compounding typically yields slightly higher returns than monthly compounding because interest is calculated more frequently.

Q2: Is this calculator only for 1-year CDs?
A: Yes, this specific calculator is designed for 1-year certificates of deposit with daily compounding.

Q3: What's the difference between APY and APR?
A: APY (Annual Percentage Yield) includes compounding effects, while APR (Annual Percentage Rate) does not.

Q4: Are CD interest earnings taxable?
A: Yes, in most cases CD interest is considered taxable income in the year it's earned.

Q5: Can I withdraw money from a CD before maturity?
A: Typically yes, but early withdrawal usually incurs a penalty that reduces your earnings.