CD Investing Question?

Question

I don't know diddley about this. What is my return if I buy a CD for $1,000, 6mo, 4.00 APR, 4.08 APY? What's the calculation for this so I can figure this for myself in the future (amt x term x apr / number of cosmos in the sky = dollar bill toilet paper)?

Answer 1

CD and the word investing don't go hand in hand. A CD is nothing more than a simple savings account that the bank gives you a piece of paper for. You have a very low APR and really isn't worth it. If you do have to gain access the the funds earlier there are nice penalty fees to go with them. When you are storing money away for 5+ years is when you are truelly investing. Anything less is simply just saving.

A money market account would be a much better place to park money for the short term, or for things like an emergency fund.

The formula for actual compount interest is
FV = P(1+r/n)^yn
FV = Final value
P = principle
r = rate in decimal (4% = 0.04)
n = how often compounded in number form (every month would be 12, daily would be 365)
y = number of years compounded

For your example
FV = 1000(1+0.04/365)^(0.5 * 365) = 1020.20

The reason they specify 4.08 APY, that is the effective yield on your amount if you had left it in that account for an entire year.
FV = 1000(1+0.04/365)^(1 * 365) = 1040.81
(FV-P)/P = APY
(1040.81 - 1000)/1000 = 0.4081 or 4.08%

Answer 2

$20 and change. 4% of $1,000 is $40. But that would be for a year so divide by 2 (6 months). The 4.08 I believe is b/c they credit interest every 30 days and some months have 31 so it works out a little over????

Bottom line - $20 and change.

Instead of a CD where your money is tied up, check out some online savings accounts. They're free and insured. Plus, the interest is higher than 4%.

www.emigrantdirect.com
www.hsbcdirect.com
www.ing.com

Answer 3

to calculate the return on a CD you need to take the interest rate
4.00% divide by 100 = .04 then divide by 365 = .000109589.

take .000109589 times the amount of the Principal $1,000 = .1096. This represents your interest per day.

finally, take the .1096 times the number of days invested, 6 months, typically is considered 182.

.1096 X 182 = $19.95

If the bank compounds this money you need to do the calculation as often as the bank does the compounding.

Banks report APY (Annual Percentage Yield) to disclose how much interest would be earned if the investment was earned for one year.

Answer 4

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