APY vs. APR in a CD Context
Banks advertise CD rates as APY (Annual Percentage Yield) which includes the effect of compounding. A 5.00% APR compounding daily produces a 5.127% APY. For CDs the difference matters because interest is typically credited at maturity (or monthly) rather than daily withdrawal.
CD APY vs. APR at various compounding frequencies
| Compounding Freq. | APR | APY | Difference on $20K 1-Yr |
|---|---|---|---|
| Annually | 5.00% | 5.00% | $0 |
| Monthly | 5.00% | 5.116% | $23.20 |
| Daily | 5.00% | 5.127% | $25.40 |
The Simple CD Return Formula
For CDs compounding monthly the formula is: A = P x (1 + r/12)^(12 x t) where A = final balance, P = principal, r = APR as decimal, t = time in years. Example: $15,000 at 5.00% APR for 1 year: A = $15,000 x (1 + 0.05/12)^12 = $15,000 x 1.05116 = $15,767.40. Interest earned: $767.40.
Period 1 (Year 1): $20,000 x 1.051 = $21,020. Period 2 (remaining 6 months): $21,020 x (1.051^0.5) = $21,020 x 1.02524 = $21,550.54. Total interest on $20,000: $1,550.54 over 18 months.
CD maturity values at common amounts and terms
| Principal | APY | Term | Interest Earned | Maturity Value |
|---|---|---|---|---|
| $5,000 | 5.10% | 6 months | $125.70 | $5,125.70 |
| $10,000 | 5.10% | 12 months | $510 | $10,510 |
| $20,000 | 4.75% | 24 months | $1,935.06 | $21,935.06 |
| $50,000 | 4.40% | 60 months | $12,100 | $62,100 |
How Banks Credit CD Interest
Most CDs compound daily and credit interest monthly. Some compound monthly. A few credit all interest at maturity (simple interest CDs). Daily compounding always produces more than monthly which produces more than maturity-only. Check whether interest can be withdrawn monthly without penalty if you need income from the CD.
- Daily compounding: interest accrues on your balance daily — most common and highest yield
- Monthly compounding: interest accrues monthly — slightly less than daily
- Interest at maturity: simple interest only — less than compound — avoid if possible
- Monthly distribution option: some CDs let you withdraw monthly interest without penalty
Calculate Your Exact CD Maturity Value
Enter principal, APY, and term to see your exact interest earnings and final balance at maturity.