1. What is a CD (Certificate of Deposit)?

A Certificate of Deposit (CD) is a savings account that holds a fixed amount of money for a fixed period of time (the term) and pays a fixed interest rate. CDs typically offer higher interest rates than regular savings accounts in exchange for keeping the money deposited for the full term.

2. How Does CD Interest Work?

The calculator uses the compound interest formula:

Where:

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

Explanation: Interest is calculated daily and compounded, meaning each day's interest earns interest on subsequent days.

3. Understanding Daily Compounding

Details: Most CDs compound interest daily, which means your interest earns interest every day. This gives slightly better returns than monthly or annual compounding.

4. Using the Calculator

Tips: Enter your initial deposit amount, the CD's annual percentage yield (APY), and the term length in years (e.g., 0.5 for 6 months). The calculator will show your final balance and total interest earned.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between APR and APY?
A: APR is the simple interest rate, while APY includes compounding effects. Always use APY when comparing CDs.

Q2: Are CD interest rates fixed?
A: Traditional CDs have fixed rates, but some special CDs offer variable rates.

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

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

Q5: What are CD laddering strategies?
A: Laddering involves opening multiple CDs with staggered terms to balance liquidity and yield.