How CD interest is calculated
CDs pay compound interest: A = P × (1 + r/n)n × t, where P is your deposit, r the annual rate, n the number of compounding periods per year and t the term in years. $10,000 at 4.00% compounded daily for 12 months grows to about $10,408.
Interest rate vs APY
Banks advertise CDs by APY (annual percentage yield), which already includes compounding. If you only know the APY, enter it as the rate with annual compounding — the result will match. The interest rate (APR) is slightly lower than the APY whenever interest compounds more than once a year.
Common CD types
| Type | How it works |
|---|---|
| Traditional CD | Fixed rate for a fixed term; penalty for early withdrawal |
| No-penalty CD | Withdraw early without a fee, usually at a lower rate |
| Bump-up CD | Lets you raise your rate once if rates go up |
| Jumbo CD | Larger minimum deposit (often $100,000), sometimes a higher rate |
| Brokered CD | Bought through a brokerage; can be sold before maturity at market price |
Things to know
- Early withdrawal penalties are often several months of interest — only lock up money you won’t need.
- In the US, CDs at FDIC-insured banks (or NCUA-insured credit unions) are protected up to $250,000 per depositor, per institution, per ownership category.
- CD interest is taxable as ordinary income in the year it’s credited, even if you don’t withdraw it (unless held in an IRA).
- A CD ladder — splitting money across several terms — gives regular access to cash while capturing longer-term rates.
Compare with regular savings using the compound interest calculator, and check that your rate beats inflation.
Frequently asked questions
How much will a $10,000 CD earn in a year?
At 4% APY, about $400. At 5% APY, about $500.
What is the difference between APY and interest rate?
APY includes the effect of compounding; the interest rate does not.
Can I lose money in a CD?
Not in an insured bank CD held to maturity, but early withdrawal penalties can reduce your return.
Is CD interest taxable?
Yes, as ordinary income in the year it is credited, unless the CD is in a tax-advantaged account.