Calculate how much interest a certificate of deposit will earn over its term. Compare rates and compounding frequencies.
A certificate of deposit is a time-based savings product offered by banks and credit unions. You deposit a fixed amount for a predetermined period (the "term"), and in return the bank pays you a guaranteed interest rate. Terms typically range from 3 months to 5 years, with longer terms generally offering higher rates.
CDs are considered one of the safest investments because they are insured by the FDIC (at banks) or NCUA (at credit unions) up to $250,000 per depositor, per institution. Unlike stocks or bonds, you know exactly how much you will earn before you commit your money.
CD interest compounds over the life of the deposit. The compounding frequency (daily, monthly, quarterly, or annually) determines how often earned interest is added to your balance and begins earning its own interest. Daily compounding produces slightly more than monthly, which produces more than annually.
The formula is A = P(1 + r/n)^(nt), where P is your deposit, r is the annual rate, n is the number of compounding periods per year, and t is the term in years. The "APY" (Annual Percentage Yield) already factors in compounding, so if a bank quotes you a 4.5% APY, that is your actual yearly return regardless of compounding frequency.
Both are safe, FDIC-insured places for cash. The key difference is liquidity. A high-yield savings account lets you withdraw anytime but the rate can change. A CD locks your rate for the full term but charges a penalty for early withdrawal. CDs are better when you want a guaranteed rate on money you will not need soon. Savings accounts are better for emergency funds and money you may need at any time.
A CD ladder divides your deposit across multiple CDs with staggered maturity dates. For example, instead of putting $10,000 in a single 5-year CD, you could put $2,000 each in 1-year, 2-year, 3-year, 4-year, and 5-year CDs. As each CD matures, you reinvest it into a new 5-year CD. This gives you regular access to a portion of your money while capturing higher long-term rates.