CD Calculator with Compound Interest

Compound Interest Formula:

\[ A = P \times \left(1 + \frac{r}{n}\right)^{n \times t} \]

Principal Amount (P):

Annual Interest Rate (r):

Time (t):

years

Compounding Frequency (n):

Final Amount (A):

Interest Earned:

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1. What is Compound Interest?

Compound interest is interest calculated on the initial principal and also on the accumulated interest of previous periods. It causes wealth to grow faster than simple interest, where interest is calculated only on the principal amount.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

\[ A = P \times \left(1 + \frac{r}{n}\right)^{n \times t} \]

Where:

\( A \) — Final amount
\( P \) — Principal investment amount
\( r \) — Annual interest rate (decimal)
\( n \) — Number of times interest is compounded per year
\( t \) — Time the money is invested for (in years)

Explanation: The formula accounts for periodic compounding, where interest is added to the principal at regular intervals, resulting in exponential growth.

3. Importance of Compounding Frequency

Details: The more frequently interest is compounded, the greater the return. Daily compounding yields slightly more than monthly, which yields more than quarterly, and so on. This effect becomes more significant over longer periods.

4. Using the Calculator

Tips: Enter the principal amount in dollars, annual interest rate as a percentage, time in years (can include fractions like 0.5 for 6 months), and select how often interest is compounded.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between APR and APY?
A: APR (Annual Percentage Rate) doesn't account for compounding, while APY (Annual Percentage Yield) does. APY will be higher than APR when compounding occurs more than once per year.

Q2: How often do CDs typically compound?
A: Most CDs compound daily, but this can vary by financial institution. Always check the terms of your specific CD.

Q3: Are CD interest rates fixed or variable?
A: Traditional CDs have fixed rates for the term. Some special CDs may have variable rates tied to market indexes.

Q4: What happens if I withdraw my CD early?
A: Early withdrawal typically results in a penalty, often a loss of several months' interest. The exact penalty depends on the CD terms.

Q5: Are CD earnings taxable?
A: Yes, interest earned on CDs is taxable as ordinary income in the year it's credited to your account, unless the CD is in a tax-advantaged account like an IRA.