Use this certificate of deposit calculator to easily calculate the cd rate, interest accrued, total return, and growth rate based on an initial deposit. Supports daily, monthly, quarterly, semiannual, and annual interest compounding. The calculator supports periodic contributions (e.g. monthly deposits) or withdrawals, tax on interest, and inflation-adjusted return.
Quick navigation:
- What is a certificate of deposit (CD)?
- Using the certificate of deposit calculator
- Why the compounding period matters
- CD return calculation example
- Return with inflation adjustment
- Financial caution
What is a certificate of deposit (CD)?
A certificate of deposit is a contract to deposit money for a fixed period of time that will pay interest to its holder. Deposit term lengths usually range from 1 month to 5 years, rarely more. Most often deposits have a term of 3 months, 6 months, 12 months (one year), or 24 months (two years). Most deposits have compounding interest rate, meaning that the accrued interest on the principal is periodically added to the principal, resulting in a growing amount of interest without additional money deposits.
The key characteristic of a CD is its rate of interest - the higher, the better, all else being equal. Usually longer-term deposits come with higher interest rates at the cost of locking in of capital and higher inflation risk. The name 'certificate of deposit' remains for historical purposes when actual paper certificates were issued to certify the deposit agreement. This is no longer the case, usually. Typically deposits offer higher interest rates than saving accounts and other bank accounts or money market accounts, but this may not hold for so-called flexible deposits with no or small early withdrawal fees. Note that in a typical CD, penalties for early withdrawal are quite substantial and might turn a deposit into a worse investment than a savings account if it comes to that.
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)
Being by entering the initial deposit amount, or your current balance if you already have a deposit. Then enter the length of the deposit term, usually in years, but we also support other time periods like months, quarters, etc.
Proceed to enter the annual interest rate: this is usually listed as APR on deposit offers and bank product comparison sites and does not take compounding into account. This is different from the Annual Percentage Yield (APY) a.k.a. Effective Annual Interest Rate which our calculator will calculate for you. It is important to note that both the APR and APY do not account for fees and other expenses in servicing the deposit. If the interest rate is taxable (it is for most U.S. deposits), enter the applicable marginal tax rate.
Specify the compounding period which should be disclosed on the offer and certificate of deposit (CD) agreement. If you plan on making regular contributions: adding to the deposit on a regular basis (monthly, yearly, etc.), enter the amount and the period on which you will make it, as well as whether you will make it in the beginning or the end of the period.
Finally, you can enter a prediction for the average rate of inflation (%) that you expect over the CD term. Significant deviations from this average will affect the accuracy of all inflation-adjusted calculations so treat them as a rough guideline only.
The CD calculator will output: the total CD return from interest (a.k.a. 'CD earnings', a.k.a. 'CD yield', a.k.a. 'CD savings'), the effective interest rate (sometimes referred to as the Annual Percentage Yield or even just as 'CD 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 is the time period at which interest is added to the principal and it can have a slight positive effect on the effective interest rate (a.k.a. Annual Percentage Yield (APY)) versus the nominal annual interest rate (APR). Compounding on shorter periods results in a slightly better effective rate, e.g. daily compounding (also called continuous compounding) when compared to yearly compounding.
If unsure, then assume annual compound interest. However, it is best to ask your banking institution for this detail.
CD return calculation example
In this example the task is to estimate the accrued return from interest 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. Assume annual compounding interest and no contributions (monthly or yearly deposits) to keep the calculation simpler. For the same purpose assume no tax on the interest.
For the first year the math is straightforward. Starting with $10,000 at 2.5% interest results in $10,000 x 0.025 = $250 interest for a final sum at the end of year one of $10,250. In year two the calculation includes compounding. 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, hence at the end of year two the deposit will be worth $10,556.25. The return is simply the difference between the final value and the initial value: $556.25.
Return with inflation adjustment
An important consideration when making any decision about a financial investment is the expected inflation rate, usually expressed in percentages. Simply put, the inflation can reduce the return on a CD in real-money terms and even turn it into a negative if the rate of inflation is greater than the CD interest rate. Depending on taxes, negative return in constant dollars is also possible even when the deposit interest rate is higher than the inflation.
The table below explores several scenarios, all with the same 2% CD rate and 4% tax rate, but with different rates of inflation:
| 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 computations were performed using our calculator. As the numbers show, even modest levels of inflation can have a dramatic impact on the inflation-adjusted return and growth. Even when inflation is equal to the CD interest rate the return is slightly negative due to the interest rate tax. That is right, you are paying taxes even as you are losing money in real terms.
Financial caution
This is a simple online tool which is a good starting point in estimating the return on investment and capital growth you can expect from a bank deposit, but is by no means the end of such a process. You should always consult a qualified professional when making important financial decisions and long-term agreements, such as long-term bank deposits. Use the information provided by the software critically and at your own risk.
