June 2, 2020

Calculating CD Rates – APY vs APR

Calculating CD Rates

calculating CD ratesThe first thing people want to know when they are investing in a certificate of deposit (aka CDs), is how much money they will earn from that particular investment. In order for them to determine their potential earnings, they will need to educate themselves on the various ways to calculate their return by using the data that is accessible. The most important of these data points are the CD rates that come along with various certificates of deposit. Investors will want to become knowledgeable about both the Annual Percentage Rate and the Annual Percentage Yield (aka APY). By using this data, investors can determine what type of earnings they can expect from the many different certificates of deposit that are available to them.

Annual Percentage Yield

If the investor has opted to allow all interest to compound over the life of the CD, then they will want to use the APY to calculate their expected earnings from that particular CD. It is not always necessary to choose the bank that offers the highest APY CD rates. This is because the amount of times a bank will compound the interest will have a bearing on the amount of return that can be earned on the investment. Knowing this, investors should search for CD rates that compound daily. This can potentially yield very high returns.

Annual Percentage Rate

The annual percentage rate is for investors who have chosen to take monthly distributions of interest payments instead of allowing it to compound. Similar to the APY, an investor should not always opt for the bank with the highest annual percentage rate. In this case, the bank will estimate how much the investor would have earned if they had opted to have CD rates compounded daily and use that metric to determine the monthly interest rate distribution.

It is always important for investors to take the time to carefully analyze all of the options available to them when considering investing in a certificate of deposit. CD rates are the main metric to consider, but investors should also be aware of any hidden fees, restrictions, or anything else that may cause them to earn less money than they can elsewhere.

APY vs APRIt is understandable that the first question a potential investor asks before they invest in a certificate of deposit is how much they can expect to earn. The answer to this is not as complicated as they might think. By simply educating themselves using the tools and data available, an investor can confidently analyze the CD rates offered by the various products available to them. It is very important to be well educated before more making a decision, because the investor will be locked into this investment for at least 3 months if they want to avoid early redemption penalties. By following the tips outlined in this article, investors will be well on their way to choosing the right certificate of deposit for their personal needs. The CD rate, APY, or APR is all you really need!

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For other information on CD Investing Visit these sources:

The Securities and Exchange Commission
The Federal Trade Commission