1. What is Compound Interest?

Compound interest is interest calculated on the initial principal and also on the accumulated interest of previous periods. For CDs, this means your money grows faster as interest earns interest.

2. How the CD Interest Calculator Works

The calculator uses the compound interest formula:

Where:

• \( P \) — Principal amount (initial investment)
• \( r \) — Annual interest rate (in decimal form)
• \( n \) — Number of compounding periods per year
• \( t \) — Time the money is invested for (in years)

Explanation: The formula accounts for how often interest is compounded (daily, monthly, quarterly, etc.), which significantly impacts total earnings.

3. Importance of High-Yield CDs

Details: High-yield CDs offer better returns than traditional savings accounts while providing FDIC insurance. Understanding compound interest helps compare different CD offers.

4. Using the Calculator

Tips: Enter principal amount in dollars, annual rate as decimal (e.g., 0.05 for 5%), compounding frequency (typically 12 for monthly), and investment term in years.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between APY and APR?
A: APY includes compounding effects while APR doesn't. Always compare APY when evaluating CDs.

Q2: Are there penalties for early withdrawal?
A: Most CDs charge a penalty (typically several months' interest) for withdrawing before maturity.

Q3: How often do CDs typically compound?
A: Most compound daily or monthly, but terms vary by institution.

Q4: Are CD interest rates fixed?
A: Traditional CDs have fixed rates, but some special CDs offer variable rates.

Q5: How does this compare to other investments?
A: CDs are lower risk than stocks but offer lower potential returns. They're ideal for short-term goals where principal protection is important.