A certificate of deposit, or CD, is a type of savings account offered by banks and other financial institutions. With a CD, you deposit your funds for a fixed term, and once your CD’s term ends—also known as “maturing”—you can withdraw your funds along with the interest earned, or you can choose to roll over your funds into another CD to continue saving. You can also withdraw your funds before a CD’s term ends, but doing so may incur an early withdrawal penalty.
CD interest is typically compounded on a fixed schedule—monthly, daily, quarterly or yearly. The interest continues to compound for the duration of your CD’s term.
In this article, we’ll learn more about how CD rates are compounded.
What is compounding interest?
Compound interest occurs when you earn interest on the initial deposit and on the interest you earn along the way. For example, if you deposited $2,000 in a savings account and earned $100 in interest at the end of the monthly closing period, your total balance would now be $2,100. For the next closing period, the interest rate on your account will be applied to your new balance of $2,100 vs. your original principal balance of $2,000.
Compounding interest may allow money deposited in a CD to grow at a faster rate than in a standard savings account. Ultimately, however, interest earned will depend on a variety of factors, such as a CD’s term, APY and the principal amount invested.
How CD rates are compounded
CD rates are usually compounded monthly or daily. The more frequently CD rates are compounded, the more compounding interest you can earn.
When CD rates are compounded daily:
- Interest is added to the principal balance each day.
- Interest is calculated on the new total (principal + interest earned) the following day.
- Your interest is compounded 365 times per year.
When CD rates are compounded monthly:
- Interest is added to the principal balance each month.
- Interest is calculated on the new total (principal + interest earned) the following month.
- Your interest is compounded 12 times per year.
Disclosure: This article is for general educational purposes. It is not intended to provide financial advice. It also is not intended to completely describe any Citi product or service. You should refer to the terms and conditions financial institutions provide for various products.
