Certificate of Deposit Calculator
Certificate of Deposit Calculator uses the amount of money (initial deposit), the interest rate of the certificate of deposit and the number of years and calculates the final balance that will be received after the investment period. It is an online financial tool which allows any individual or business to know how much total return and interest an investor get for the fixed investment for a fixed period of time.
It is necessary to follow the next steps:
- Enter three values for the starting balance of deposit, interest rate of the certificate of deposit and number of years in the box. These values must be positive real number;
- Press the "CALCULATE" button to make the computation;
- Certificate of Deposit calculator will give the total returns and accumulated interest earnings in a certificate of deposit over time.
Output : Two positive real numbers as total returns and interest amount.
Present Value Formula :
The total returns of an investment in a certificate of deposit, $C$, is determined by the following formula: $$C= P\times\Big(1 + \frac{r}{n}\Big) ^ {t\times n}$$ where $P$ is the initial deposit amount, $r$ is the annual interest rate in decimal form, $n$ is number of compounding periods per year and $t$ is the numbers of years the money is invested for.
Interest Amount Formula:
The interest earnings in a certificate of deposit is determined by the following formula: $$P\times\Big[\Big(1 + \frac{r}{n}\Big) ^ {t\times n}-1]$$ where $P$ is the initial deposit amount, $r$ is the annual interest rate in decimal form, $n$ is number of compounding periods per year and $t$ is the numbers of years the money is invested for.
What is Certificate of Deposit?
A certificate of deposit or shorter CD is a time deposit, a financial product commonly sold by banks, thrift institutions, and credit unions. It's different from savings accounts because the it has a specific, fixed term and fixed interest rate. The idea is that the certificate of deposit be held until the fixed maturity date, on maturity the money can be withdrawn together with the interest. The maturity and interest amount would vary based on the fixed maturity date and a fixed interest rate. One of the most important among many terms and conditions associated with the certificate of deposit is that it restricts access to the invested money until the the maturity date.
How to Find Time to Maturity Amount of CD?
To find the total returns of an investment in a certificate of deposit is the same as the standard formula for compound interest. The total returns of an investment in a certificate of deposit is determined by the following formula:
$$C= P\times\Big(1 + \frac{r}{n}\Big) ^ {t\times n}$$
where $C$ is the total returns, $P$ is the initial deposit amount, $r$ is the annual interest rate in decimal form, $n$ is number of compounding periods per year (for example, $12$ for monthly compounding) and $t$ is the numbers of years the money is invested for.
Now, the interest earnings in a certificate of deposit is determined by the following formula:
$$P\times\Big[\Big(1 + \frac{r}{n}\Big) ^ {t\times n}-1]$$
The investors may use certificate of deposit calculator to determine the best investment plan by comparing the different investment plans available in the finance market or do their financial problems efficiently.
Real World Problems Using Certificate of Deposit
Certificate of Deposits are offered by many financial institutions as fixed income investments. Different banks offer different interest rates on certificate of deposits. So it is necessary to make a financial analysis and compare maturity periods. Banks use the funds from certificate of deposits to re-lend, hold in their reserves, spend for their operations, or take care of other miscellaneous expenses. Certificate of Deposits mostly pay higher interest than savings accounts, they are a good option for people who don't need access to the money for a set period.
Practice Problems for Certificate of Deposit
Practice Problem 1:
If we invest $\$52,000$ in a certificate of deposit with a interest rate of $7.3\%$ compounded annually for $3$ years, find the total returns.
Practice Problem 2:
If we invest $\$13,200$ in a certificate of deposit with a interest rate of $2.3\%$ compounded quarterly for $5$ years, find the total interest earnings.
The certificate of deposit calculator, example calculation, work with steps and practice problems would be very useful for grade school students of K-12 education to understand the concept of compound interest and to estimate the future value on an investment before investing. It will help them to make their financial analysis.