1. What is Compound Interest?

Compound interest is interest calculated on the initial principal and also on the accumulated interest of previous periods. For CDs (Certificates of Deposit), this means your money grows faster as you earn interest on both your original deposit and the interest you've already earned.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

Where:

• \( A \) — Final amount
• \( P \) — Principal amount (initial investment)
• \( R \) — Monthly interest rate (annual rate divided by 12, as a decimal)
• \( N \) — Number of compounding periods (months)

Explanation: The formula accounts for exponential growth of your investment through periodic compounding.

3. Importance of CD Interest Calculation

Details: Understanding how much your CD will earn helps in financial planning and comparing different investment options. CDs are low-risk investments that offer guaranteed returns.

4. Using the Calculator

Tips: Enter the principal amount in dollars, annual interest rate in percentage, and term in months. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: How often is interest compounded on CDs?
A: Most CDs compound interest daily or monthly, but this calculator assumes monthly compounding for simplicity.

Q2: Are CD interest rates fixed?
A: Traditional CDs have fixed rates, but some banks offer variable-rate CDs. This calculator assumes a fixed rate.

Q3: What happens if I withdraw my CD early?
A: Early withdrawals typically incur penalties, which would reduce your earnings. This calculator assumes you hold the CD to maturity.

Q4: Are CD earnings taxable?
A: Yes, interest earned on CDs is generally taxable as income in the year it's earned, unless in a tax-advantaged account.

Q5: How does this compare to other investments?
A: CDs offer lower returns than stocks but with much lower risk. They're ideal for short-term savings goals or conservative investors.