1. What is Daily Compounding?

Daily compounding means that interest is calculated and added to the principal balance every day. This results in slightly higher returns compared to monthly or annual compounding because you earn "interest on interest" more frequently.

2. How Does the Calculator Work?

The calculator uses the daily compounding formula:

Where:

• \( A \) — Final amount ($)
• \( P \) — Principal amount ($)
• \( r \) — Annual interest rate (decimal)
• \( t \) — Time in years

Explanation: The formula accounts for interest being calculated and added 365 times per year, leading to exponential growth of your investment.

3. Importance of Daily Compounding

Details: Daily compounding maximizes your returns compared to less frequent compounding periods. Even small differences in compounding frequency can lead to significant differences in final amounts over long periods.

4. Using the Calculator

Tips: Enter the principal amount in dollars, annual interest rate as a percentage (e.g., 2.5 for 2.5%), and time in years. All values must be positive numbers.

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 and added more frequently.

Q2: Are all CDs compounded daily?
A: No, compounding frequency varies by institution. Always check the terms of your specific CD.

Q3: What's the difference between APY and APR?
A: APR is the annual rate without compounding, while APY includes the effect of compounding. This calculator shows the APY equivalent.

Q4: Are CD interest earnings taxable?
A: Yes, interest earned on CDs is typically taxable as ordinary income in the year it's credited.

Q5: Can I withdraw money from a CD before maturity?
A: Usually yes, but with an early withdrawal penalty that varies by institution and could reduce your earnings.