How a CD earns interest
A certificate of deposit (CD) is a savings product where you agree to leave a fixed sum on deposit for a set term in exchange for a guaranteed interest rate. Because the rate is locked and the funds stay put, a CD compounds predictably. The maturity value is:
A = P (1 + r/n)nt
- A — value at maturity
- P — your initial deposit
- r — annual interest rate as a decimal
- n — compounding periods per year
- t — term in years
Interest rate vs. APY
The stated interest rate doesn't tell the whole story — compounding adds a little extra. The annual percentage yield (APY) captures that effect, so it's the number to compare across banks. A 4.5% rate compounded monthly works out to roughly 4.59% APY. Our calculator shows the effective APY for the compounding frequency you choose.
Choosing a CD term
Longer terms usually pay higher rates, but they also lock up your money for longer. If you might need the cash sooner, a shorter term or a CD ladder — splitting your money across several CDs that mature at staggered dates — can balance yield and flexibility. Remember that withdrawing early almost always triggers a penalty that eats into your interest.
A quick example
Deposit $10,000 in a 12-month CD at 4.5% compounded monthly and you'll have about $10,459 at maturity — roughly $459 in interest, for an APY near 4.59%. Stretch the same rate to a 5-year term and compounding does even more of the work.
Frequently asked questions
How is CD interest calculated?
A certificate of deposit earns compound interest using A = P(1 + r/n)^(nt), where P is your deposit, r is the annual rate, n is how often interest compounds per year, and t is the term in years. Interest is added to the balance each period and then earns interest itself.
What is the difference between interest rate and APY?
The interest rate is the nominal annual rate, while APY (annual percentage yield) reflects the effect of compounding over a year. Because of compounding, the APY is always equal to or higher than the stated rate. Banks advertise APY so you can compare CDs fairly.
Can I withdraw money from a CD early?
Usually only with a penalty. Most CDs lock your funds for the full term, and withdrawing early typically forfeits some or all of the interest earned. This calculator assumes you hold the CD to maturity.
Is CD interest taxable?
Yes. Interest earned on a CD is generally taxable as ordinary income in the year it is credited, even if you do not withdraw it. This calculator shows pre-tax results.
Disclaimer: Results are estimates for educational purposes only and are not financial advice or an offer. Actual CD terms, rates, and penalties vary by institution.