One needs to input four details in the CD calculator on the basis of which it works:
• Initial Deposit Amount
• Annualized Interest offered
• Term of the CD
• Interest compounding intervals
Initial deposit amount varies from a few hundred dollars to as high as $50,000 or more. However, it varies from one bank to the other, and some of the banks have a minimum amount defined for the investment in CDs.
APR or the Annual percentage rate defines the interest rate on the CDs. As is evident, shorter term of the investment qualifies for a lower interest while longer term provides a higher interest rate or APR.
CDs maturity depends on the term selected. Some of the CDs can be for a shorter term of 6 months while the others may be as long a 5years. Whatever be the term one must clarify the details in the offer document provided at the time of investing.
Interest on the CDs are compounded at fixed intervals which again varies from one CD offer to the other and also depends on the term of the CDs. CDs with very short term like 6months to one Year might provide you with simple interest only. But those for duration of 3 years and more may offer compounded interest. The APR is added to the principal and the new amount becomes the principal for the new term is what the basic maths behind the compound interest calculation is.
CD calculator have inbuilt features wherein they can calculate interest for the term like daily, monthly,quarterly,semi-annulaly or annual .
CD calculators are designed from the perspective of making CD ladder calculations too. Thus actually helps an investor to earn maximum profits on the CDs while maintaining the liquidity.
Let's see an example to understand the laddering calculations.
Let's suppose that an individual decides to invest $100,000 for a five year term. Under the laddering concept he invests in 5 different CDs.
$20,000 for 1year, $20,000 for 2 years and so on till he invests the final $20,000 for 5 years. Now, keeping the date of investment in the CDs as same, he invests the first CD amount which he receives in the CD which is for a term of 5 years. Similar each year for years he keeps investing the matured CD amounts in the 5year CD. This will result in much higher earnings at the completion of the 5 years and this concept of reinvesting is referred to as laddering of CDs.
CD calculators help in keeping a track of the investment rates.