Certificate of deposit calculator
This CD calculator allows you to easily calculate the rate, interest earned, overall return, and growth rate by entering your initial deposit. You can select from various compounding options such as daily, monthly, quarterly, semi-annual, and annual. Additionally, the calculator accounts for regular deposits or withdrawals, taxes on interest, and return adjusted for inflation.
What is a certificate of deposit (CD)?
A certificate of deposit (CD) is a financial product where an individual deposits money for a specific period of time, usually ranging from 1 month to 5 years, in exchange for a higher interest rate. The interest is often compounded, meaning it is added to the principal, resulting in a growing amount of interest without additional deposits. CDs typically offer higher interest rates than savings accounts, but early withdrawals may result in substantial penalties. The term “certificate of deposit” refers to the historical practice of issuing paper certificates to certify the deposit agreement, but this is no longer the case.
A CD, or certificate of deposit, is a type of bank deposit that typically offers a higher interest rate than other types of bank accounts, such as savings or money market accounts. The interest rate on a CD is an important factor to consider, as it can vary widely among different types of CDs. Longer-term deposits tend to have higher interest rates, but they also come with the trade-off of locking in capital and higher inflation risk. The name “certificate of deposit” refers to the historical practice of issuing paper certificates to certify the deposit agreement, but this is no longer the case. Some CDs have penalties for early withdrawal, so it is important to consider these fees when choosing a CD as an investment option.
Using the certificate of deposit calculator
Our CD calculator is a versatile financial tool which will help you calculate:
- the effective interest rate on a CD
- the final amount of money you will get from a deposit at the end of its term
- how much your capital will grow by using a certificate of deposit
- the final amount and the capital growth adjusted for inflation
- the total tax on interest you will have to pay (if applicable)
To use a CD calculator, start by entering your initial deposit amount or current balance if you already have a deposit. Next, enter the length of the deposit term, typically in years, but other time periods like months or quarters may also be supported.
Enter the annual interest rate, which is typically listed as APR on deposit offers and bank product comparison sites. Note that the APR does not take compounding into account, unlike the Annual Percentage Yield (APY) which the calculator will calculate for you. Keep in mind that both APR and APY do not account for fees and other expenses associated with the deposit. If the interest rate is taxable, enter the applicable marginal tax rate.
Specify the compounding period as disclosed on the deposit offer or CD agreement. If you plan on making regular contributions to the deposit, enter the amount and the period in which you will make them, and whether they will be made at the beginning or end of the period.
Finally, you can enter a prediction for the average rate of inflation you expect over the deposit term. Keep in mind that significant deviations from this average will affect the accuracy of all inflation-adjusted calculations, so use this as a rough guideline only.
The calculator will output the total CD return from interest, the effective interest rate, the capital growth as a percentage, the deposit value at the end of the term, as well as the sum total of taxes and contributions or withdrawals. If an inflation rate was entered, you will also see a few inflation-adjusted numbers.
Why the compounding period matters
The compounding frequency refers to how often interest is added to the principal balance of a deposit. It can have a small impact on the effective interest rate (also known as the Annual Percentage Yield (APY)) compared to the nominal annual interest rate (APR). Compounding on shorter time periods, such as daily (also known as continuous compounding), can result in a slightly higher effective rate compared to compounding annually.
If you are unsure about the compounding frequency, it is best to check with your banking institution for this information. However, if you cannot find this information, it is safe to assume that the interest is compounded annually.
CD return calculation example
In this example, we are trying to calculate the return on an investment in a certificate of deposit with an initial value of $10,000 and an annual interest rate of 2.5% over a period of two years. We will assume annual compounding interest and no contributions to keep the calculation simple. For this example, we will also assume that the interest is not taxable.
For the first year, the calculation is simple. Starting with $10,000 at 2.5% interest results in $10,000 x 0.025 = $250 in interest for a final sum at the end of year one of $10,250. In the second year, the calculation includes compounding. We start by adding the $250 returned in year one to the principal, then calculate the interest on what is now effectively a $10,250 deposit. At 2.5%, that is $10,250 x 0.025 = $256.25, resulting in a final deposit value of $10,556.25 at the end of year two. The return is the difference between the final value and the initial value, which is $556.25.
Return with inflation adjustment
The expected inflation rate is an important factor to consider when making any financial investment decision, as it can significantly impact the return on the investment in real-money terms. In the case of a CD, if the inflation rate is higher than the CD interest rate, it can reduce the return on the investment or even result in a negative return. Additionally, depending on taxes, a negative return in constant dollars is possible, even if the deposit interest rate is higher than the inflation rate.
The table below illustrates several scenarios with the same 2% CD rate and 4% tax rate, but with different rates of inflation. It shows how the expected inflation rate can affect the return on a CD investment:
| Initial Deposit | Return (2y) | Final Value | Inflation Rate | Inflation-Adjusted Growth | Inflation-Adjusted Value |
|---|---|---|---|---|---|
| $10,000.00 | $387.69 | $10,387.69 | -1% | 5.925% | $10,592.53 |
| $10,000.00 | $387.69 | $10,387.69 | 0% | 3.877% | $10,387.69 |
| $10,000.00 | $387.69 | $10,387.69 | 1% | 1.848% | $10,184.85 |
| $10,000.00 | $387.69 | $10,387.69 | 2% | -0.160% | $9,984.01 |
| $10,000.00 | $387.69 | $10,387.69 | 3% | -2.148% | $9,785.17 |
| $10,000.00 | $387.69 | $10,387.69 | 4% | -4.117% | $9,588.33 |
The table above shows the results of calculations performed using a CD calculator. The numbers demonstrate how even moderate levels of inflation can greatly affect the inflation-adjusted return and growth on a CD investment. As the inflation rate increases, the inflation-adjusted return and growth decrease. Even when the inflation rate is equal to the CD interest rate, the return is slightly negative due to the tax on the interest rate. This means that even when the investment is losing value in real terms, taxes are still being paid on it.
Financial caution
This tool is a basic way to estimate potential returns and growth from a bank deposit, but it should not be the only resource used when making financial decisions. It is important to consult with a professional before making any long-term agreements or investments. Use the information from this tool carefully and with caution.