Certificate of Deposit Interest Rates, CD Interest Rates

How to understand certificate of deposit interest rates. The best way to get educated on CD investing.

Compare APY vs APR

When looking at cd interest rates you should understand the difference between APR an APY.

Annual percentage rate (APR) describes the interest rate for a whole year. It has been annualized.

Annual Percentage Yield (APY) is like APR but it takes into account any fees and compounding of interest over the period of a year. APY is calculated as follows:

APY = (1+Interest Rate/# of compounding periods)^# of compounding periods - 1

APY is probably the best indicator when comparing CDs. Make sure you compare apples to apples by comparing the APY of each CD so that you get the highest CD rates. Do not assume that the CD interest rate you are looking at is the APY.

CD Example

Here is an example. Let's say Joe the investor has $2,000 to invest in a CD. He is comparing two separate CDs:

• Joe's Bank wants Joe to invest in a CD that matures in 1 year, compounds quarterly, and has an APY of 4.45%.
• Joe's Credit Union wants Joe to invest in a CD that matures in 1 year, compounds quarterly, and has a APR of 4.45%.

Which investment would be the best for Joe? Here is a rundown of what Joe's investment would look like at either institution after one year.

• Joe's Bank would give Joe $89.00 of interest.
• ($2,000*.0445) = $89.00
• Joe's Credit Union would give Joe $90.50 of interest.
• APY=(1+.0445/4)^4 = .04525
• ($2,000*.04525) = $90.50

As you can see, Joe does slightly better at his credit union. He earns $1.50 more. It is not a large amount in this example, but can be much larger in different circumstances, especially with high yield CDs.

Return to the top of Certificate of Deposit Interest Rates

Money-Management-Works Home Page