Certificates of deposit (CD) are akin to savings account in banks and credit unions, thus, practically risk-free for investors. However, it is important to note that for added deposit protection, opt for those financial institutions with insurance from the Federal Deposit Insurance Corporation for banks and the National Credit Union Administration for credit unions.
You will want to know how much your CDs will be worth after its fixed term, which usually ranges from 3 months to 5 years. In this case, you only need to know four things: the principal amount of the CD, the fixed term, the fixed interest rate and the compounding interval. From these data, you can compute for the two most important rates on determining the value of the CD – the annual percentage yield and the annual percentage rate.
Annual Percentage Yield
The annual percentage yield (APY) refers to the amount of interest earned on the CD within a year with the assumption that the investor opted for a compounding interest on the CD until it reaches its maturity period. You can then compare the yield provided by various CDs offered by the banks and credit unions on “oranges to oranges” and “apples to apples” basis.
To manually compute for the APY, just use the following formula: APY = (1 + r/n )n – 1 where r is the interest rate in its decimal form and n is the number of compounding periods per year. From the final results, you can then decide what is the best CD for your needs where APY is concerned.
If you want to make life easier, you can always log in to a website that features CD rates calculations. Just enter the necessary data and, in just minutes, you have your answer. When you compare CDs based on APY, the one with the highest APY is the best choice since you will enjoy the highest interest benefit, too. However, you must also take note of other factors like callability, withdrawal options and interest payment options.
Annual Percentage Rate
If you chose to enjoy monthly interest payments, the APR is the tool to compute for CD rates. All other things being equal, you want to invest your money on the financial institution offering the highest APR.
Again, you can use the online calculators offering APR computations to make heads or tails of the figures. You just enter the deposit amount, the annual interest rate provided, the number of months until maturity, and the compounding interval (daily, monthly, quarterly, semi-annually and annually). You will then be provided with the future value, interests earned and even the APY.
For example, if you have a deposit amount of $100,000 with annual interest rate of 1.5% on 36 months and annual compounding interval, then your future value will be at $104,567.84 within that one year.
Choosing a CD based on APR and APY will not automatically yield the best rate of investment. These are just tools to help you narrow down your CD choices. Other factors like the terms on withdrawal of interest and principal, penalties and fees, and automatic renewal must also be carefully considered.
There are investments that give you a better return than CDs. Visit http://www.bond-trading.org/ to learn more.