Certificates of deposit, or CDs, are gaining more and more popularity these days. This is because of a lot of great benefits behind a CD. For one, it is safe because the federal government insures this kind of deposit. Plus, it pays a higher interest than that of regular savings account. The only difference is that when it is withdrawn prior to maturity, you are bound to pay some sort of penalty for it.
There are a lot of factors that can affect a CD's future value. There is the deposit agreement, and also the interest rate. To help you get a clearer picture of its future value, here's how you can calculate it yourself:
- Study the information provided to you during the purchase. Check out the data provided to you when you have bought the CD. Know how the interest is earned. If, for instance, the interest is paid to you on a periodic basis, the prospected value of the deposit will not change. However, if, in any case, the interest is periodically added to the original value of the certificate, its value will be increasing periodically too. The following steps will help you calculate a CD's future value if its interest rate is added to the CD's current value.
- Determine the CD's periodic interest rate. To help you find this rate, know the CD's annual interest rate and also the compounding days. The latter refers to the length of time that the interest is being added. This can be on a weekly or monthly basis. Divide the CD's annual interest rate by the number of days in a year or equivalent to 365. Then, multiply it by the compounding date. The result will be the CD's periodic interest rate.
- Calculate the ongoing value of the deposit. Multiply the starting value of the certificate of deposit by its periodic interest rate. Then, add this to the starting value or the principal amount of the CD to find the ending balance for the first week or month.
- Repeat the calculations. Take note of the CD's last ending balance and multiply it by the CD's periodic interest rate. Then, add the calculated result to the ending balance. Repeat this process until such time that you reach the end of the CD's term.
- Use a special formula for this calculation. The above-mentioned steps determine a CD's future value in a longhand method. The good news is that there is a special formula to help you easily do this calculation. The formula for this calculation is F=Px1^R. The F refers to the future value, the P is for the principal, and the 1^R is the periodic interest rate raised to the compounding period.
- Use a special online calculator. Check out the Internet for a CD value calculator to have a totally easy and accurate calculation. It can provide you the CD's future value upon indicating the interest rate, principal amount of the CD, and the terms. The calculator will automatically provide the value of the CD at the end of the term.
There are a lot of ways to help you in calculating a CD's future value. As long as you know what to do, there is no more worry about miscalculating it. Whether you wish to do it the long way or the short one, the above-mentioned steps will provide you with a great approximation of your CD's future value.