Bank certificates of deposit provide a combination of a safety of principal and the ability to earn yields greater than the rates paid on savings or money market accounts. Banks advertise rates and yields for different CD options. You can use that information to calculate your earnings on a specific CD.
Rates and Yields
The bank provides you with an annual interest rate and the annual percentage yield -- APY -- for a certificate of deposit. The APY is the yield the CD will earn over the course of the year when the quoted annual interest rate is compounded using the stated compounding period. For an example, 5 percent compounded annually gives an APY of 5 percent. If the 5 percent rate is compounded daily, the APY will be 5.127 percent.
CDs for One Year or Less
Calculate the earnings from a CD with a term of one year or less by dividing the annual percentage rate by the term of the CD and then multiply by the amount invested. For example, you invested $10,000 in a six month CD with a 5 percent rate. The return for six months will be 2.5 percent. That percent times your investment amount produces $250 in earnings on the CD. The certificate will be worth $10,250 when it matures. If the CD compounds interest more often than the term of the CD, your actual return will be a little higher than the result from this simple calculation. If the six month CD was compounded daily, the interest earned would be $253.13.
Multi-year CD Return
For a CD with a term longer than one year, you apply the APY for each year in the term of the CD. The interest will compound, allowing you to earn more each year. For example, you invested $10,000 in a 3-year CD with an APY of 5.6 percent. In the first year you earn $560 in interest. For the second year, the 5.6 percent APY is applied to the total of $10,560, resulting in interest earned of $591.36. In the third year you will earn interest of $624.47. The total return for three years will be $1,775.83. Calculate the return for any multi-year CD using the same steps, or use a compound interest calculator.
CD Investing Considerations
The APY number published by a bank includes the effects of compounding during the year. If one CD compounds daily and the other quarterly but both have the same APY, your return will be the same with either CD choice. Interest from a CD will not compound if you elect to have the interest paid to you instead of staying in the account. For interest that is paid out, the annual return will be the annual interest rate times the amount invested. It will be the same each year for longer-term CDs.