1. What is a 5-Year CD?

A 5-Year Certificate of Deposit (CD) is a savings account with a fixed interest rate and maturity date (5 years). It typically offers higher interest rates than regular savings accounts in exchange for keeping your money deposited for the full term.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

Where:

• \( A \) — Final amount including interest
• \( P \) — Principal investment amount
• \( r \) — Annual interest rate (decimal)
• \( n \) — Number of compounding periods per year
• 5 — Number of years

Explanation: The formula accounts for compound interest, where interest is earned on both the principal and accumulated interest.

3. Importance of CD Calculations

Details: Calculating potential earnings helps compare different CD offerings and understand how compounding frequency affects returns.

4. Using the Calculator

Tips: Enter principal amount in dollars, annual interest rate as a percentage (e.g., 4.00 for 4%), and select compounding frequency. All values must be positive.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between APY and APR?
A: APY includes compounding effects while APR does not. For CDs, APY gives a better picture of actual earnings.

Q2: Are CD earnings guaranteed?
A: Yes, CDs from FDIC-insured banks guarantee principal and interest, provided you don't withdraw early.

Q3: What happens if I withdraw early?
A: Most banks charge an early withdrawal penalty, typically several months' interest.

Q4: Are CD interest rates fixed?
A: Traditional CDs have fixed rates, but some banks offer bump-up or step-up CDs with rate adjustments.

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