Formula and Execution

Initial deposit

The initial investment in the certificate of deposit is called the initial deposit.

Interest rate

The interest rate is the fixed-rate at which the investor deposit their money in the bank.

Term

For how many years the money is invested is called the term.

Compounding frequency

The number of time the amount is compounded in the year is called compounding frequency.

Final balance

The initial amount you invested plus the interest earned on that amount is called final balance, also called the future value of the investment.

Interest earned

The amount earned over and above the principal amount is called interest earned.

Certificate of Deposit (CD calculator)Certificate of DepositSteps involved in CD CalculatorFormulas used in the CD CalculatorFAQS1. Can you lose your money in a CD?2. What are the advantages and disadvantages of CDs?3. What are the features of CDs?4. Do you have to pay taxes on a CD when it matures?5. What is the main difference between CDs and money market securities?6. When a money market securities better than CDs?7. When are CDs better than money market securities?8. What is the difference between CDs and annuity?9. Do CDs pay daily, monthly, or yearly?10. What is the minimum amount required to open the CDs account?11. How to find the future balance of CDs in excel?12. How does a CD work?13. Which CD term should I choose?14. What happens to my CD at maturity?15. Should I let my CD rollover?16. What are the different types of CDs?

Certificate of Deposit (CD calculator)

The investment in the stock market and bond market has a drawback- the fluctuation in bonds and shares prices and the subsequent rate of return. These fluctuations in prices make the investor skeptical about the investment in bonds and the stock market. They start looking for investment opportunities where they can get stable returns without any fear of up and down in prices and yields. One such investment opportunity is an investment in a certificate of deposit. Investment in the certificate of deposit gives you stable returns without any variability in returns. Calculating the rate of return on the certificate of deposit is a hectic and challenging task. “Calculator beast" created different tools to make the process of calculation easy and straightforward. One such tool is the certificate of deposit calculator, also called a CD calculator.

 

Why is the CD calculator used?

Manual calculation always pose problems such as:

  • The manual calculation is a quite tiresome and challenging task.
  • There are high chances of error in calculation.
  • It consumes a lot of your time.

To get rid of such problems, we use a CD calculator.

 

How can it help?

CD calculator is helpful in many ways such as:

  • It saves you time, and you can invest that time in some other productive tasks.
  • It gives you free of error values, until and unless you can’t put the wrong values.
  • Manual calculations suck up all your energy and make you dull and sluggish; CD calculator saves your energy through quick and timely calculations.

 

To whom will it help?

CD calculator is helpful for those who want to calculate profit on their investment. It can be handy for the following peoples.

  • Bankers: Those bankers whose job is to give consultancy to the customers on investment can use the CD calculator to calculate the rate of return and profit on investment in the certificate of deposit.
  • Students: Students can also use a CD calculator while doing their assignment or research on a certificate of deposit.
  • Researchers: Researchers can also use a CD calculator while writing their researcher's papers on investment in a certificate of deposit.  

Certificate of Deposit

A certificate of deposit is a product offered by the bank. It gives you a fixed interest rate for the predetermined period. Certificate of deposit gives you higher returns than saving accounts and money market securities but less than stocks and bonds.

 

Conditions in the certificate of deposit:

  • It gives you a fixed interest rate, and these rates will not change with the changes in market rates.
  • The amount must be invested for a predetermined period.
  • A penalty will be imposed on early withdrawals of your investment.

Steps involved in CD Calculator

There are four steps involved in the calculation of the final balance in the CD calculator. These steps are 

  1. Initial deposit
  2. Interest rate
  3. Term
  4. Compounding frequency 

Putting values in the first three steps is a must. If any of the first three steps are left vacant, it gives you no result in the final balance. Setting up the number of periods in step 4 is optional; you can set periods of your choice started from days till a year.

 

Remember: The compounding frequency value must be the one for which you are compounding the interest rate. For example, if the interest rate is compounding monthly, then select the month and so on so forth. For the compounding of interest, you can also use Apy-calculator. APY calculator gives you the compound interest rate.

 

Example: An investor invested $10,000 in the certificate of deposit on a 7% interest rate for two years compounded monthly. What will be his final balance at maturity?

Solution:

                 Initial deposit = $10,000

                 Term = 2 year

                  Interest rate = 7%

                  Compounding frequency = Monthly 

Put these values in a CD calculator; it gives you the following values, as shown in the picture.

 

Note: The more the interest rate is compounded, the more future value will be and vice versa.

In the above example, the compounding frequency is changed from monthly to quarterly, now let see the effect of compounding on the final balance.

 

Initial deposit = $10,000

Term = 2 years

Interest rate = 7%

Compounding frequency = Quarterly

Put these values in the CD calculator; it gives you the following values, as shown in the picture.

 

The final balance in case of quarterly compounding decreases as compared to monthly compounding.

 

Formulas used in the CD Calculator

There are three formulas used in the CD calculator.

 

  1. Future value formula: This formula is used to find the final balance at the end of the maturity of the investment. The formula of future value is (Present value (1+r) ^n) where present value is the initial deposit, r is the interest rate, and n is the number of years the amount invested.
  2. Compounding formula: This formula is used to find the compound interest rate. The formula of compounding is (1 + r/n) ^n -1. Where n is the number of compounding periods, and r is the interest rate.
  3. Interest earned: This formula is used to find the interest or profit earned on an investment. The formula of interest earned is (Final balance – initial deposit).

 

Example: An investor invests $5,000 in the certificate of deposit at an 8% interest rate for three years compounded semi-annually. Find the future value.

Solution:

                Initial deposit = $5,000

                Interest rate = 8%

                Term = 3 years

                Compounding = semi-annual

Compound interest rate = (1 + r/n) ^n – 1

                                          = (1 + 0.08 / 6) ^6 – 1

                                         = 0.0827 or 8.27%

Compound interest rate = 8.27%

You can also calculate the value of the compound interest rate through APY calculator here, Apy-calculator. APY calculator gives you a more accurate value of compound interest rate.

Future value = Present value (1+r) ^n

                       = 5,000(1+0.04) ^6

                 Future value      = $6,326

 

Note: the interest rate and the number of years in future value formula must be adjusted for the number of compounding.

 

Interest earned = future value – initial value

                            = 6,326 – 5,000 

                     Interest earned    = $1,326

Solving it manually takes a lot of time, so you can solve it on a CD calculator without any time-wasting as follow. 

 

FAQS

1. Can you lose your money in a CD?

A certificate of deposit allows you to invest money on a guaranteed fixed interest rate for a predetermined period. The banks ensure CDs, so there is no risk of losing money.

 

2. What are the advantages and disadvantages of CDs?

Advantages of CDs

It gives you a high-interest rate than saving accounts and money market securities.

  • There is no volatility in the rate of return, i.e., the interest rate is fixed.
  • There is no chance of losing the investment.
  • It keeps you away from extravagant spending because there is a penalty on withdrawal before maturity.
  • If the interest rate in the market is less as compared to interest on CDs. Then those who invest their money in CDs are earning more than the market.

Disadvantages of CDs

  • You cannot redeem the amount before maturity.
  • If you want to redeem the amount before maturity, then you have to pay the penalty.
  • The rate of return on CDs is less than stock and bonds.
  • If the Interest rate in the market is more than the interest rate on CDs, than an investor is earning less than the market.

 

3. What are the features of CDs?

The following are the features of the certificate of deposit.

  1. Eligibility: The financial institutions or banks issue certificates of deposit to the individual, mutual funds, trust, and companies.
  2. Maturity period:  Commercial banks issued CDs ranging from 7 days to one year, while financial institutions issued it for a period of one to three years.
  3. Transferability: CDs can be transferred to saving account or money market account.
  4. Loan against CD: Certificate of deposit cannot be put as collateral in case an investor wants to borrow money from the bank.

 

4. Do you have to pay taxes on a CD when it matures?

There is no tax on the principal amount, although the interest earned on CDs are taxable. Once the interest amount is transferred to your CD account, it becomes taxable.

 

5. What is the main difference between CDs and money market securities?

The following are the differences between CDs and money market securities.

S.NO.DescriptionCDsMoney market securities
1Interest rateFixVariable 
2InvestmentLong termShort term
3Interest rateHighLow
4LiquidityLessHigh
5Before maturity withdrawal PenaltyNo penalty

 

6. When a money market securities better than CDs?

If you have an immediate need for cash, then invest money in the money market because on withdrawal of funds before maturity, there is no penalty. As the interest rate on money market securities is not fixed, and it changes with the changes in the market interest rate, so the time of higher interest rates, the money market is beneficial.

 

7. When are CDs better than money market securities?

If you don't need money in the short term, then invest money in a certificate of deposit because it offers you a higher interest rate as compared to money market securities. In the time of low-interest rate in the market, CDs gives you more returns than the market.

 

8. What is the difference between CDs and annuity?

The following are the main differences between CDs and annuity.

S.NO.DescriptionCDsAnnuity
1The third-party insuredYesNo
2Penalty on Before maturity withdrawalYesAnnuity account imposes no penalty on up to 10% withdrawal of funds.
3Deposits limitYesNo

 

9. Do CDs pay daily, monthly, or yearly?

It depends on the policy of banks or financial institutions. But in most cases, CDs pay monthly.

 

10. What is the minimum amount required to open the CDs account?

Some banks need no minimum requirement, and they open a CDs account without any condition while some banks require a minimum amount to open a CDs account. In most cases, the minimum amount started from $500 to $1000.

 

11. How to find the future balance of CDs in excel?

There is a special function in excel to calculate the future value of CDs. Three steps are involved in the calculation of future value in excel. These three steps are 

  1. Put the value of the initial deposit in any cell of excel. The sign in excel for initial value is "PV."
  2. Put the value of interest rate in the subsequent cell of excel. The sign of interest rate in excel is “rate."
  3. Put the number of years in the following cell. The sign of the number of years in excel is "NPER."

Once you put all these values in excel, then apply the function of future value. The sign of future value in excel is "FV." The formula of Future value in excel is {= FV (rate,nper,pmt, PV). PMT is the present value of the annuity. If the present value of the annuity is given in question than the formula of future value in excel will be {=fv (rate, nper, pmt)}, If simply the present value is given then the formula of future value in excel will be {=fv (rate, nper,, PV)}.

Example: An investor deposits $5,000 in the certificate of deposit for three years on an 8% interest rate compounded yearly. Find the future value of the investment.

Solution:

                Present value = $5,000

                Term = 3 years

                Interest rate = 8%

               Compounding = yearly.

               Future value =?

Put the above values in excel and apply the function of the future value. It gives you the future value as follows.

 

NOTE: While putting the value of the initial deposit or present value, put the minus sign or () in front of the initial deposit, as shown above. If you forget the minus sign or (), excel will give you negative future value, as shown below.

 

 

12. How does a CD work?

Once you find a CD with a high-interest rate as compared to other CDs, then completing the process will lock you into four things.

  • Interest rate: Once you agree with a bank to invest in their certificate of deposit. The bank will secure your investment with a fixed interest rate. The advantage of fixed interest is that it gives you predictable returns, and the bank cannot change the interest rate in the later stages.
  • The term:  This the duration you want to invest your money in the bank. E.g., one year or two years, etc. You cannot redeem your investment before the agreed time; otherwise, the penalty will impose on you.
  • Principal amount: This is the initial amount you agree with the bank to invest.
  • Institution: The bank or other financial institution will determine the terms of your agreement with the bank. Such as penalty on early withdrawal or reinvestment of the amount.

 

13. Which CD term should I choose?

While choosing the CD term, keep in mind two important considerations.

  1. If you need the money shortly than invest in such CDs which are short term. If you don't need money soon and you have extra cash, then invest in a long term certificate of deposit.
  2. If the interest rate on CDs is expected to rise shortly, then invest in short term CDs so that your money should not be invested for a longer time on a low-interest rate. If the interest rate is expected to decrease shortly, then spend your money for the longer term so that you should get benefit from the current increase of interest rate.

 

14. What happens to my CD at maturity?

One or two months before maturing your CD, the bank or other financial institution will inform you about the maturity date of your CD. They will brief you on what to do with your CD. They will put three options-

  1. Roll over the CD: They will inform you of the rollover process and what the benefits of rolling over the CD. If you have a CD of five months, then most likely, it will be rolled over to one year CD.
  2. Transfer the fund: They also give you the option to transfer your fund to another bank account, e.g., saving account or to money market account.
  3. Withdraw the proceeds: The third option is to move your fund to an external bank account or issued the cheque to you.

 

15. Should I let my CD rollover?

Rolling over the CD without inquiring about the CD rates in other banks or financial institutions is an unwise move. Before rolling over the CD, an investor must ask about the interest rates in other banks on CD. If they are offering higher rates than the current rate on CD than an investor should not roll over the CD and instead withdraw their fund and invest it in more top interest rate CD. If the rates are low as compared to the current bank, then rolling over the CD is the best option. So before rolling over the CD, inquire about the interest rates offers by other banks on CD.

 

16. What are the different types of CDs?

In general, withdrawing money from the CD account before maturity will cost you the penalty. But banks and financial institutions are offering you different types of CDs which relax the above condition.

  • Bump-up CD: In regular CD, once you lock your interest rate on CD, then the same rate remains until the maturity of the CD. But in the bump-up CD, they give you the relaxation of accessing the interest rate one time during the term. For example, if the interest rate goes up from the current interest rate of CD, then the bank will allow you once to lock up in the new interest rate.
  • Add-on CDs: In general, certificate of deposit allows only a single deposit, i.e., the money you deposited initially will lock up for the agreed period, no additional deposit is permitted in your CD. But in case of an add-on, CD banks allow you to add an additional amount to your already present principal amount. In the case of add-on CDs, the interest rate remains the same; you are allowed to add an amount in your CD account. Some banks put limits on the additional amount, e.g., monthly limit or quarterly, etc. While some allow only one-time deposit of further amount.
  • No-penalty CDs: Typically penalty will be imposed if you withdraw your fund from CD account before maturity. But in case of no-penalty CDs, there is no penalty on early withdrawals. But this relaxation in penalty comes with a cost, i.e., the interest rate on such CDs is low as compared to regular CDs. So before investing in no-penalty CDs, compare the interest rate of standard CDs with the benefit you get from no-penalty CDs. If the benefits are more than go ahead, otherwise invest your money in some other CDs, which gives you better returns.
  • Jumbo CDs: Regular CDs don't require an initial deposit, or they need very less initial amount depending on the bank. In the case of Jumbo CDs, the minimum requirement is a $50,000 deposit in your CD account.
  • IRA CDs: These Certificates of deposit are offered to those who are nearing to their retirement age. They offer an excellent interest rate, and for investing in IRA CDs, you must open the IRA account.