Certificate of Deposit (CD) Calculator

A certificate of deposit is a time deposit: the holder surrenders liquidity for a fixed term in exchange for a rate the institution fixes at issue. Maturity value follows the compound interest formula, in which the nominal rate is divided by the number of compounding periods per year and the exponent is periods times years. Because compounding frequency changes the outcome, the comparable figure across offers is the annual percentage yield, the effective rate after one year of compounding. A 5.00 percent nominal rate compounded monthly yields 5.116 percent, and compounded daily it yields 5.127 percent. Balances are insured to 250,000 dollars per depositor, per insured institution, per ownership category by the FDIC at banks and by the NCUA at credit unions. Three risks survive that insurance. Early withdrawal penalties are stated in months of interest, commonly three months on terms under a year and six to twelve months on multi-year terms, and can bite into principal if the certificate is broken early. Reinvestment risk is the possibility that prevailing rates have fallen by the time the certificate matures, which laddering across staggered maturities is designed to blunt. Inflation risk is the most underrated of the three: a 4 percent certificate held through 5 percent inflation loses real purchasing power, and interest is taxed as ordinary income in the year it accrues even when the funds cannot yet be reached without penalty.

Fixed-term bank deposits are old, but the modern instrument traces to a specific regulatory problem. The Banking Act of 1933 empowered the Federal Reserve to cap interest paid on deposits through Regulation Q, which left banks unable to compete for corporate cash whenever short-term market rates rose above the ceiling. Corporate treasurers moved balances into Treasury bills instead, a drain bankers called disintermediation. In 1961 First National City Bank of New York, the predecessor of Citibank, under Walter Wriston, introduced the negotiable certificate of deposit, and the Discount Corporation of New York agreed to make a secondary market in it. Because the certificate could now be sold before maturity, it offered the holder liquidity while giving the bank a stable funding term. The retail market that followed was reshaped by later legislation. The Depository Institutions Deregulation and Monetary Control Act of 1980 began phasing out the Regulation Q ceilings, a process completed in 1986, after which banks competed openly on advertised CD rates. The Truth in Savings Act of 1991, implemented as Regulation DD, then required uniform disclosure of the annual percentage yield so that consumers could compare offers with different compounding schedules on equal terms. Deposit insurance coverage was raised from 100,000 to 250,000 dollars in 2008 during the financial crisis and made permanent in 2010.