How Do You Figure Interest Rates On A CD?
A CD is a certificate of deposit with a banking institution such as a commercial bank or credit union. CDs, like all banking products, are insured by the FDIC or NCUA up to a certain maximum. CDs earn a pre-set rate of interest that is computed via a simple interest calculation. Write out the simple interest formula: Interest = Principal x Rate x Time -or- I = PRT Fill in the terms: Principal is the amount you will deposit into the CD. Rate is the interest rate the bank is pay in decimal form (5% is .05). Time is the amount of time the CD is set for in years (one year = 1, 6 months = .5) Multiply and to get the answer for how much interest you will earn. Example: P = 1,000 R = 5% T = 10 years I = PRT 1,000 x .05 x 10 = 500 After 10 years, $1,000 deposited in a CD will earn $500 of interest, for an ending account value of $1,500.
