# How to Calculate a CD Interest Rate

A certificate of deposit is a bank investment that pays out a specific amount of money on a given date after the CD is opened. Unlike a regular bank account, you cannot withdraw money from the CD until it "matures," when it reaches the set date of the investment. CDs typically pay higher interest rates than other bank accounts, and are a good place to invest money you will not need for some time. There are three kinds of CD interest rates: simple interest, compounded interest and annual percentage rate (APR).

#### 1

Determine what interest rate is being offered for the CD, and which type of interest is posted. A simple interest rate pays back exactly that amount in a given time period. For example, a 5 percent interest rate per year on a $1,000 CD pays $50 at the end of the year. A compound interest rate pays that interest over time in set increments. For example, a 0.5 percent monthly compounded rate pays that amount every month, but then pays out additional interest on interest previously paid. This CD will pay $5 the first month, but will then pay $5.03 the next month on the total $1,005 balance. APR calculates what would be paid on the CD over the course of an entire year, and is frequently used to compare investments.

#### 2

Calculate APR from simple interest rates by extending or reducing the time period to a single year. For example, a CD may offer 1.5 percent simple interest over a three-month period. There are four three-month periods in a year, so this APR is 6 percent per year. However, if you "roll over" the full amount every three months, your interest will compound, turning a simple interest rate into a compounded interest rate. Starting with $1,000, you will have $1,015 in month 3, $1,030.23 in month 6, $1,045.68 in month 9 and $1,061.37 at the end of the year, with a total APR of 6.14 percent.

#### 3

Calculate APR from compounded interest by determining the actual amount a CD will pay over time, dividing it by the amount initially invested and extending it (or reducing it) to one year. This is the same calculation as you did in the last step, when a simple interest rate became compounded over several investment periods.

The formula for total return is:

(1 + Interest Rate) ^ (Interest Periods) x (Initial Investment)

In the prior example, this was (1 + 0.015)^4 x $1,000, which came out to $1,061.37, with an APR of 6.14 percent. For a one-month CD paying 0.25 percent, the investment pays (1 + 0.0025)^12 x $1,000 after one year, which is $1,030.42. This is an APR of 3.04 percent.

Writer Bio

Ellis Davidson has been a self-employed Internet and technology consultant, entrepreneur and author since 1993. He has written a book about self-employment for recent college graduates and is a regular contributor to "Macworld" and the TidBITS technology newsletter. He is completing a book on self-employment options during a recession. Davidson holds a Bachelor of Arts in American civilization from the University of Pennsylvania.