CDs are forms of investment that earn interest, which is how investors gain a return; however, investors find that they earn greater returns on compound interest. The difference between compound interest and its opponent, simple interest, is how it is earned. Simple adds earns only once the end of a year, while compound continues to earn even after previous interest earned has already been tacked on.
How Do CDs Earn Interest?
Certificates of deposit (CDs) are different than other forms of investment because they don’t offer as high a return as stocks, due to their predetermined interest rate that must mature over time. How much interest you earn depends on: current rates, how much you invest, the length of time allotted for your investment, and the bank you choose. It’s especially important to shop around for rates that suit you because believe or not, banks typically don’t offer competition in this arena.
How is Compound Interest Earned?
When working with CDs, or even savings accounts, you benefit from compound interest. But the fun part of dealing with this type of interest is how quickly it can accumulate money for you. As mentioned previously, it is interest added onto your already accrued interest, as well as your principal. This means, depending on how often it compounds, you can make some pretty great returns over an extended period of time.
APY’s Role in Compound Interest
The annual percentage yield (APY) plays a large role in the compound interest of your CDs. Different than the annual percentage rate (APR), which calculates the interest you’ve earned in one year, the APY calculates what you’ve earned while taking compounding into account. The more frequently your interest is paid, the higher your yield will be – which definitely a good thing.
Being able to earn compound interest on your CDs offers the benefit of increased returns. So if you’re interested in buying certificates of deposit as forms of investment, conducting research on this earning feature is well worth your time.
so how do you know which banks compound interest to my benefit in my CD’s?