Method · The Calculation
How to Calculate CD Interest
One formula, three numbers. Here is exactly how a certificate of deposit grows — by hand, with real rates — and why the APY is the only number you need to compare offers.
§ 1 · The Formula
The CD Interest Formula
A certificate of deposit pays you a fixed, guaranteed return for locking your money away for a set term. The math behind that return is simpler than most people expect. There are two forms of the same formula — which one you reach for depends on whether your bank quotes an APY or a plain interest rate.
Most banks today advertise the APY (Annual Percentage Yield), which already includes the effect of compounding. When you have an APY, the formula is short:
Where FV is the future value (your balance at maturity), P is your deposit (the principal), APY is the annual percentage yield written as a decimal, and t is the term in years. Subtract your deposit and you have the interest earned.
The General Compound Interest Form
If a bank gives you a nominal interest rate and a compounding schedule instead of an APY, use the general form:
Where r is the nominal annual rate (decimal), n is the number of compounding periods per year (365 for daily, 12 for monthly, 1 for annual), and t is the term in years. The two forms agree once you convert between rate and APY — which we do in §4.
§ 2 · The Method
Calculate CD Interest in Four Steps
- Convert the percentage to a decimal. Divide by 100: 4.35% becomes 0.0435.
- Express the term in years. 1 year = 1; 18 months = 1.5; 3 months = 0.25.
- Plug into the formula. Raise (1 + APY) to the power of the term, then multiply by your deposit.
- Subtract your deposit. Future value minus principal equals the interest you earned.
§ 3 · Worked Examples
Three Worked Examples
The clearest way to learn the formula is to run real numbers through it. These use rates in the current market.
Example 1 — One Year at 4.35% APY
Deposit $10,000 into a 1-year CD at 4.35% APY.
Interest earned = $10,435.00 − $10,000 = $435.00
Example 2 — Five Years at 4.35% APY
The same $10,000, locked for 5 years. This is where compounding starts to show.
Interest earned = $12,372.64 − $10,000 = $2,372.64
Notice the five-year CD earns far more than five times the one-year figure ($435 × 5 = $2,175). The extra ~$198 is interest earning its own interest in years two through five.
Example 3 — Nominal Rate, Compounded Monthly
A bank quotes a 5.00% interest rate, compounded monthly, for a 3-year CD on $10,000. Use the general form with n = 12.
FV = $10,000 × (1 + 0.05/12)12×3 = $10,000 × (1.004167)36 = $11,614.72
Effective APY = (1 + 0.05/12)12 − 1 = 5.116%
The effective APY (5.116%) is higher than the stated 5.00% rate because monthly compounding reinvests interest throughout the year. If this bank had simply advertised “5.116% APY,” Example 1’s short formula would have given the same answer.
§ 4 · APY vs Rate
APY vs. Interest Rate
The interest rate (the nominal rate) ignores compounding. The APY includes it. Because a CD reinvests your interest as it accrues, the APY is always a touch higher than the nominal rate whenever interest compounds more than once a year.
A 5.00% rate compounded monthly works out to 5.116% APY; compounded daily it is marginally higher still. The practical rule: always compare CDs by APY. It is the single number that tells you what you actually earn, regardless of how the bank compounds internally.
§ 5 · Try It Yourself
CD Interest Calculator
Fill in the blanks — the figures settle as you type, using the APY formula above.
§ 6 · Questions on Record
Frequently Asked Questions
How do I calculate CD interest?
Multiply your deposit by (1 + APY) raised to the power of the term in years: FV = P × (1 + APY)t. Then subtract your deposit to get the interest. For $10,000 at 4.35% APY for one year: $10,000 × 1.0435 = $10,435.00, or $435.00 of interest.
What is the formula for CD interest?
The APY form is FV = P × (1 + APY)t. The general compound-interest form is FV = P × (1 + r/n)(n×t), where r is the nominal rate, n is compounding periods per year, and t is the term in years. Use the APY form when your bank quotes an APY, since it already includes compounding.
Is CD interest compounded daily or monthly?
It depends on the bank — CDs may compound daily, monthly, or quarterly, and the difference is small. Because banks advertise the APY, which already reflects compounding, you can compare CDs directly by APY without worrying about the compounding frequency.
What is the difference between APY and interest rate?
The interest rate (nominal rate) ignores compounding; the APY includes it. A 5.00% rate compounded monthly equals 5.116% APY. APY is always at least as high as the nominal rate when interest compounds more than once a year, and it tells you what you actually earn.
How much interest does $10,000 earn in a CD?
At 4.35% APY, $10,000 earns about $435 in one year ($10,435 at maturity). Over five years at the same APY it grows to about $12,373 — roughly $2,373 of interest.
How do I calculate APY from an interest rate?
Use APY = (1 + r/n)n − 1, where r is the nominal annual rate and n is the number of compounding periods per year. For 5.00% compounded monthly: (1 + 0.05/12)12 − 1 = 5.116% APY.
Do CDs earn simple or compound interest?
CDs earn compound interest — your interest earns interest in subsequent periods. That is why the APY is higher than the stated rate, and why longer terms grow faster than a simple-interest calculation would suggest.
Now run every term at once
This page teaches the math by hand. Our CD rate calculator does it for you across all nine standard terms — reverse-solves for a savings goal, and factors in early-withdrawal penalties and tax. Computed entirely in your browser.
Open the CD interest calculator