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High Yield CD Formula:
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A High Yield Certificate of Deposit (CD) is a savings account that offers higher interest rates than regular savings accounts in exchange for locking in your money for a fixed period (term). This calculator specifically calculates returns for 1-year CDs with monthly compounding.
The calculator uses the compound interest formula:
Where:
Explanation: Interest is calculated monthly (12 times per year) and added to the principal, resulting in "interest on interest" which grows your money faster than simple interest.
Details: High Yield CDs offer guaranteed returns, FDIC insurance (up to $250,000 per depositor), and typically higher rates than regular savings accounts. They're ideal for short-term savings goals where you can afford to lock up funds.
Tips: Enter your principal amount in dollars, annual interest rate as a percentage (e.g., 5.25 for 5.25%), and time in years (1 for one year). The calculator will show your final balance and total interest earned.
Q1: How does monthly compounding differ from annual compounding?
A: Monthly compounding calculates and adds interest 12 times per year, resulting in slightly higher returns than annual compounding due to more frequent application of interest.
Q2: Are there penalties for early withdrawal?
A: Yes, most CDs charge a penalty (typically several months' interest) for withdrawing funds before the term ends.
Q3: How do CD rates compare to other investments?
A: CDs generally offer lower returns than stocks but are much safer. Current CD rates often beat regular savings accounts and money market accounts.
Q4: Is the interest taxable?
A: Yes, CD interest is taxable as ordinary income in the year it's earned, unless held in a tax-advantaged account like an IRA.
Q5: Can I add more money to my CD?
A: Typically no - most CDs require you to deposit the full amount upfront and don't allow additional contributions.