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Calculate the final balance and interest earned on a certificate of deposit using compound interest.
A = P(1 + r/n)^(nt)
Where: P = Principal, r = Annual interest rate (decimal), n = Compounding frequency per year, t = Time in years
APY = (1 + r/n)^n - 1
A CD is a savings product offered by banks that pays a fixed interest rate for a set term. In exchange for a higher rate, you agree not to withdraw funds until maturity.
APY (Annual Percentage Yield) is the effective annual return that accounts for compounding. It is always equal to or higher than the stated annual interest rate.
More frequent compounding means interest is calculated on previously earned interest more often, resulting in slightly higher returns. Daily compounding yields the most.
Most CDs charge an early withdrawal penalty, typically equal to several months of interest. The exact penalty depends on the bank and the CD term.
Yes. Interest earned on CDs is taxed as ordinary income in the year it is received, even if you do not withdraw the funds.
APR is the stated annual rate before compounding is applied. APY reflects the actual return including the effect of compounding, making it a more accurate measure of earnings.